A 2-1 buydown is the type of mortgage financing that lowers interest rate for the first two years of the loan. The rate is usually two percent lower during the first year and one percent lower in the second year and then it rises to regular, fixed rate.
2-1 buydown financing is a good deal for homebuyers, because their monthly payments will be lower at the beginning and it is earthier to qualify for a mortgage loan.
Lenders charge a fee for 2-1 buydown programs, either a homebuyer or a seller can pay for a buydown. Home sellers may want to consider offering (and paying for) a 2-1 buydown as an incentive to make their listing more attractive.
Example of a 2-1 Buydown Mortgage
Suppose a homebuyer took a $200,000 mortgage loan with an interest rate on 30-year mortgage at 5%.
- First year homebuyer will get a mortgage rate at just 3%, their monthly payments during the first year would be $843:
- Second year the mortgage rate will go up to 4%, bringing the monthly payment up to $995;
- Third year and for the rest of the term the rate will be 5% and monthly payment would rise to $1,074.
Benefits of a 2-1 Buydown
For sellers – Offering 2-1 buydown to buyers can help them sell home faster and for a good price.
For buyers – 2-1 Buydown financing can help buyers qualify for a mortgage than they otherwise wouldn’t and will keep monthly payments low for the first two years of the loan.
Things to consider
- 2-1 Buydown loan comes at a cost, either buyer or seller will have to cover it.
- Buyers have a risk that their income won’t keep pace with increasing mortgage payments, they need to be ready for increased payments.
A lot of lenders rolled out 2-1 buydown programs right now to help homebuyers qualify for a mortgage ad achieve the dream of homeownership. Contact us to get pre-approved.