2-1 Buydown
What is a 2-1 buydown?
A 2-1 buydown is a temporary mortgage financing arrangement that lowers the interest rate for the first two years of a loan. The rate is typically:
– 2 percentage points below the permanent rate in year one,
– 1 percentage point below in year two,
– then the full, permanent rate from year three onward.
The reduced rate is paid for upfront, either by the borrower, the seller (including home builders), or another party. Funds are often deposited into an escrow account and used to subsidize the borrower’s monthly payments during the buydown period.
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How it works
- The lender charges a fee to cover the interest shortfall during the discounted period.
- The buydown reduces initial monthly payments, easing early cash flow and helping borrowers qualify.
- After two years the monthly payment increases to reflect the permanent rate and remains at that level for the remainder of the mortgage.
Example
If the permanent rate is 5% on a $200,000, 30-year mortgage:
– Year 1 at 3% → monthly payment ≈ $843
– Year 2 at 4% → monthly payment ≈ $995
– Year 3+ at 5% → monthly payment ≈ $1,074
These figures illustrate how monthly payments rise after the buydown ends.
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Pros and cons
Pros for buyers
– Lower initial payments make qualifying for a mortgage easier.
– Provides a temporary affordability cushion while income may rise.
– Can enable purchase of a more expensive home than otherwise affordable.
Cons for buyers
– Future payments will be higher; if income doesn’t increase, payments may become unaffordable.
– Sellers may raise the asking price to offset the buydown cost, reducing the deal’s net benefit.
– Not all lenders or programs offer buydowns; terms vary.
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Pros for sellers
– Makes a property more attractive and can speed up a sale in a slow market.
Cons for sellers
– The cost of the buydown reduces net proceeds from the sale.
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When to consider a 2-1 buydown
- Sellers: to incentivize buyers when inventory is high or demand is low.
- Buyers: when you expect rising income, want lower initial payments, or need temporary relief to qualify.
- Avoid relying on a buydown unless you can comfortably handle the permanent payment after two years.
Availability and special rules
- Buydowns can be structured in different ways and may not be available from every lender.
- Some mortgage programs limit buydowns. For example, FHA loans allow 2-1 buydowns only for new mortgages, not refinances.
- Always confirm specific program rules and lender terms.
Is a 2-1 buydown a good deal?
It depends. A 2-1 buydown can be beneficial if you plan for and can afford the permanent payment that begins in year three. Evaluate whether the upfront cost (or the seller’s price adjustment) and the future payment increase fit your financial plan.
FAQs
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Who pays for a 2-1 buydown?
Either the buyer or the seller can pay. Builders and sellers often pay to attract buyers; buyers may pay to lower interest costs early on. -
How long does the buydown last?
Two years in a 2-1 buydown, after which the loan reverts to the permanent rate. -
Will the home price be affected?
Possibly. Sellers sometimes raise the sale price to offset the cost of funding a buydown.
Bottom line
A 2-1 buydown offers lower mortgage payments for the first two years by temporarily reducing the interest rate. It can help buyers qualify or ease early cash flow, and sellers can use it as a sales incentive. Carefully assess the permanent payment you’ll face after year two and verify lender and program availability before proceeding.