A 2-1 buydown mortgage is a mortgage in which the interest rate is reduced for the first two years. After that, the interest rate is increased to the original rate. This type of mortgage is often used to help buyers afford a home.
Discover more: Mortgage Interest Rate
How do I compare 2-1 buydown mortgage offers?
A 2-1 buydown mortgage offers the homebuyer a lower interest rate for the first two years of the loan than the starting interest rate. The buyer finances or pays “points” to lower their interest rate for the first two years. After the initial two years, the interest rate is adjusted to the current market rate. A 2-1 buydown mortgage may be a sensible option for a homebuyer who:
1) plans to live in the home for only a few years and sell before the interest rate adjusts, 2) expects their income to increase substantially during the initial two-year period, making the higher monthly payments more affordable later on, or 3) simply wishes to take advantage of a lower interest rate for the first few years of ownership.
To compare 2-1 buydown mortgage offers, homebuyers should first calculate the monthly payment for each loan at the interest rate for years three and beyond. Then, they should compare the total amount of interest they would pay over the life of the loan. Finally, they should consider how long they plan to stay in the home and whether they are likely to sell before the interest rate adjusts. A 2-1 buydown mortgage may be a good option for some homebuyers, but it’s not the right choice for everyone.
Expand your knowledge: 1 down Mortgage Loans
Frequently Asked Questions
What is a 2-1 buydown on a mortgage?
A 2-1 buydown is a mortgage loan option in which the seller or builder reduces the homebuyer’s interest rate for the first two years of the loan. In year one, the interest rate is 2% less than the original, locked-in rate. In year two, the interest rate is 1% less.
What is a 2/1 rate Buydown Program?
A 2/1 rate buydown program is a low-interest mortgage program that allows homebuyers to lock in a lower interest rate for the first two years of their loan, and then return to the original rate for the remaining term. For example, if you were looking to borrow $200,000 at 4.5% over 30 years, a 2/1 rate buydown would reduce your interest rate to 3.5% for the first two years and then revert back to 4.5% after that. This can save you tens of thousands of dollars over the first 24 months of your loan!
What is a 3-2-1 buy-down mortgage?
A 3-2-1 buy-down mortgage allows the borrower to lower the interest rate over the first three years through an up-front payment. A buydown is a mortgage-financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage, but possibly its entire life.
How does a home buydown work when buying a house?
A homebuyer can use a buydown to receive a lower interest rate on a mortgage, typically for a set period of time after purchase. This allows the buyer to enjoy the benefit of a lower interest rate until the buydown expires, usually after several years.
What is a 1-0 buydown?
A 1-0 buydown is a way to reduce your interest rate by 1% the first year of your mortgage, returning to the original rate the second year.
Sources
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- https://www.investopedia.com/terms/1/2-1_buydown.asp
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