A 2/1 buydown loan is a loan 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, you get a lower mortgage payment during the first two years. The 2-1 buydown program has been very popular with borrowers in the Merrimack Valley, where home prices continue to rise.
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 a low initial payment but doesn’t want an adjustable-rate mortgage
- 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
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 loan is an excellent 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. In addition, the cost associated with the buydown loan can also be paid for by the homebuyer, realtors, or home builder.
In 2022 as property values continue to rise, sellers do not need to offer many incentives due to a lack of inventory in the Merrimack Valley. 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 were looking for a new home in Methuen, Haverhill, and Lawrence, but the rising interest rates made the monthly payments unaffordable for us as first-time homebuyers. We both have been in our jobs for a short time now and anticipate that our income will go up substantially within the next couple of years. The 2-1 buydown program recommended by our loan officer Jim Driscoll will save us money on our monthly payments for the next two years!”
~ Zyada and Jose Cantaro.
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.
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 in the Merrimack Valley and others to use as they adjust to making a mortgage payment while also making repairs and upgrades to their home or putting 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!
