A 2-1 buydown loan is a mortgage with a reduced payment for the first two years of the loan, and then the third year of the loan, the payment will rise to its note rate. So basically, you get a lower mortgage payment in the first two years of your loan.
Why are we seeing 2-1 buydown loans now?
Generally, when interest rates are rising, lenders look for products to make homeownership more affordable for borrowers. A 2-1 buydown is a temporary buydown that lasts for two years and helps borrowers get lower monthly payments. A 2-1 buydown is an excellent loan option for homebuyers, but they need to be sure they can afford the new payment when the first two years have passed.
A 2-1 buydown is frequently used as an incentive by a home seller if they are having difficulty selling their home and need to make the offer more enticing. Often, it helps the property sell more quickly; however, the cost comes from the proceeds of the sale of the home. Another way to do a buydown is for the homebuyer, realtors, or home builder to pay.
In 2022 as property values continue to rise, sellers do not need to offer many incentives due to a lack of inventory. Still, buyers see the opportunity to make their monthly payments more affordable and are taking advantage of the buydown option. For example, most of the 2/1 buydown loans at Mortgage Equity Partners are financed by homebuyers. The funds to reduce the payments are deposited in an escrow account and made on behalf of the borrower. So in effect, a portion of the payment gets prepaid at closing.
“We took advantage of the 2-1 buydown program at Mortgage Equity Partners. We had been looking for a home for a while, and our loan officer told us we could reduce our monthly payments for the first two years with the buydown program. It works for us because we both expect to make more money in the next two years, so we aren’t concerned about the payment rising in the third year.”
~ George and Kayla Peterson, MEP First Time Homebuyers
Here is how it works:
This example is based on the current 30-year fixed-rate mortgage with an interest rate of 7%.
A 2-1 buydown is a simple fixed-rate mortgage where a portion of the payment is prepaid over two years.
Who is the best borrower for a 2-1 buydown loan?
- A borrower whose income could increase within two years
- A borrower whose spouse or partner will return to work in the next two years
- A borrower who wants to reduce the cost of their monthly payment for the first two years of homeownership to pay for upgrades or repairs
- A borrower who wants a low initial payment but doesn’t want an adjustable-rate mortgage
How do I qualify for a 2-1 buydown loan?
A borrower must qualify for the loan at the current mortgage rate. For example, if you are getting a 30-year fixed-rate loan and the rate is 7%, then you must also be able to qualify for the loan at that rate. In addition, your DTI or debt-to-income ratio must not exceed that required to qualify for the loan.
The 2-1 buydown loan is an excellent tool for first-time homebuyers and others to use as they adjust to making a mortgage payment. With the savings, they can make repairs and upgrades to their home or put the savings away to prepare for the higher rate to come. So if you want to buy a home now and need a solution to lower your monthly payments, a 2-1 buydown could be for you!
