What is a 2-1 Buydown loan?
A 2-1 Buydown Loan is a mortgage lending technique that provides for a lower mortgage payment during the first two years of the loan term. In the first year, the principal and interest payment will be based on 2% below the note rate. The principal and interest payment will be based on 1% below the note rate in the second year. For the remainder of the term, the payment will be based on the note rate (the actual interest rate on the loan).
How is this possible?
The buyer, seller, lender, or builder can fund the buydown. In addition, the buydown cost can be split between different parties in the transaction. The funds are collected at closing, placed in an escrow account, and paid monthly to make the full P&I payment at the note rate.
What’s great about this program is that homebuyers can purchase a new home at a more affordable payments giving them two years to make lower mortgage payments and ease into the full payment based on the note rate amount. So essentially, homebuyers will get two years of lower payments.
The buydown program can be used for owner-occupied homes and second homes for purchases and rate and term refinance. However, borrowers cannot get cash out by using this program.
How is the rate determined on a 2-1 Buydown mortgage?
The rate is two percentage points lower than the note rate during the first year and one percentage point lower than the note rate in the second year.
Why are we seeing the 2-1 Buydown program now?
In an environment where mortgage rates are rising, the 2-1 buydown benefits homebuyers by helping them afford a larger mortgage and a more expensive home. It is especially appealing to first-time homebuyers who may be having trouble purchasing a home in the current market. In general, the 2/1 buydown will be great for anyone with limited income for a short time but who anticipates their income to increase significantly by year three of the loan. For example, some highly prepared recent college graduates might have just enough savings to make lower payments for a couple of years before landing that higher-paying job. There may be several other situations where this format makes sense for those who expect their future income to rise. However, homebuyers need to be cautious because if their income doesn’t increase as anticipated, they could be stretched too thin financially.
In a buyer’s market, the 2-1 Buydown loan is often used to make it faster and easier for sellers to sell their homes at a reasonable price. The downside is that the funds the seller pays for the buydown come from the net proceeds of the home sale.
If you are interested in purchasing a new home and like the idea of easing into your mortgage payments, get started today on a 2-1 Buydown Loan.
