What Is a 2-1 Buydown Loan and How Does It Work?

When mortgage rates are up, temporary buydowns can be a great alternative for homebuyers.

With a 2-1 buydown, mortgage borrowers can get reduced mortgage payments for the first two years of their loan. Payments return to the regular rate in the third year.

Continue reading to learn more about 2-1 buydowns, including how they work, their advantages, and their potential drawbacks. This information will empower you to make a well-informed decision when navigating the home-buying process.

In this article (Skip to...)

• What is a 2-1 mortgage buydown?
• Should you consider a buydown?
• How to qualify for a buydown
• Pros and cons of a 2-1 buydown
• Temporary vs permanent buydown
• FAQ

What is a 2-1 mortgage buydown?

A 2-1 buydown, also known as a temporary buydown, is a way to lower your interest rate for the first two years of your mortgage term, helping make those first couple of years as a homeowner more affordable.

With this program, your mortgage rate will be 2% lower in the first year and 1% lower in the second year. When you enter the third year of your mortgage term, your rate will increase to the original rate on your loan.

As an example, let’s say a home builder is offering a 2-1 buydown as a new home incentive to attract homebuyers. If the current 30-year fixed mortgage rate is 7%, a homebuyer could obtain a mortgage with a rate of 5% for year one, 6% for year two, and then 7% starting in year three and for the remaining term.

Using the same scenario, if you took out a $300,000, 30-year mortgage, your monthly mortgage payment during the first year would be $1,610. In the second year, your payment would go up to $1,799. Your monthly payment would then rise to $1,996 in the third year.

Keep in mind that this scenario doesn’t include taxes and insurance, so your actual monthly payment may fluctuate accordingly.

Why you should consider a 2-1 buydown

The benefit of a 2-1 buydown is that you have lower mortgage payments for the first two years of your loan, making it easier to afford a home.

Knowing how much your payments will be in the first two years, and then comparing them to the payment you’ll have in the third year and beyond, can provide invaluable insight. This allows you to forecast your mortgage payments accurately and determine if this option aligns with your financial goals.

Another benefit of a 2-1 buydown program is that it may broaden your home search. For example, let’s say you’re pre-approved for a purchase of up to $450,000 and an interest rate of 7%. You’ve decided, however, that you’re sticking to a price range that’s closer to $400,000 because you’re more comfortable with the payments.

Now, let’s say you know you’re expecting a raise in the next year or two. Or, perhaps your spouse is going back to work, or about to get a new job that pays better. Knowing you’ll be able to more comfortably afford a higher payment in the next couple of years, a 2-1 buydown could mean increased home affordability or even a higher-priced home.

Comparing seller concession options

When most homebuyers think about negotiating a better deal, we typically think in terms of a lower purchase price. However, a 2-1 buydown could be more beneficial for both you and the home seller.

In the scenario below, you can see how applying the same amount, in this case roughly $10,000, to a temporary 2-1 buydown as compared to a reduction to the sales price.

*Hypothetical scenario meant for informational purposes only. Monthly payments do not include amounts for property taxes, homeowners insurance, or mortgage insurance.

Opting for the temporary buy-down alternative basically incurs the same, sometimes lower, costs for the seller while offering substantial monthly savings to the buyer during the initial two years.

How to qualify for a 2-1 buydown

While 2-1 buydowns are common, not all lenders offer them. It’s important to understand the availability of this loan buydown option and how all of the terms work before a decision.

To qualify, mortgage borrowers must meet the eligibility criteria for the loan based on the full mortgage rate prior to the buydown. For instance, if you’re seeking a 30-year fixed-rate mortgage loan at a 7% rate, you must qualify based on 7%, as opposed to the lower rates and payments you would have for the first two years.

The upfront costs of buying down your rate must be covered by either the seller, builder, or buyer.

There are some restrictions when it comes to federally funded mortgage programs. FHA loans, for example, allow temporary buydowns, but only on purchase transactions.

Mostly, the other qualifying criteria for the 2-1 buydown are based on the type of loan you’re obtaining. For example, most mortgage lenders require a minimum credit of 580 or higher for FHA and VA loans. Conventional loans typically require a 620 minimum score.

The same applies to debt ratio requirements and down payment amounts. In other words, most of the aspects of qualifying for a loan will remain the same regardless of the 2-1 buydown.

Pros and cons of a 2-1 buydown

All mortgage loans come with their own set of unique pros and cons based on the type of loan and your own personal circumstances. For homebuyers, a 2-1 buydown can be ideal when mortgage rates are higher, as it allows you to purchase a home now and potentially refinance later if interest rates drop.

2-1 buydown pros

• Reduced interest rate for a two-year period
• Often, the seller or contractor will cover the initial fee as a concession
• You may be able to consider a pricier home
• You have time to boost your income in the first two years, helping make your upcoming mortgage payments more comfortable

2-1 buydown cons

• Your interest rate and monthly payments will go up each year for the first two years
• Even though you’ll enjoy lower payments during the first two years, you must qualify for the payment based on the full rate increase
• If your income doesn’t increase by year three, or worse, goes down, the increased payments may become a challenge
• If you can’t get the seller to cover the costs of the 2-1 buydown, the initial fee can be substantial and could offset any potential savings

Is it better to do a 2-1 buydown or buy the rate down forever?

There are some important distinctions when deciding between a temporary buydown vs a permanent buydown.

With a 2-1 buydown, your mortgage rate and payments are lower for two years. Then, your rate and payments will increase based on the full and final interest rate for the remainder of your loan term.

Opting for a permanent buydown means you (or the seller) will be paying an additional fee to secure a reduced interest rate, but that rate and payment will be the same throughout the life of your home loan. This method can be better for reducing long-term interest costs and monthly payments.

Choosing between a temporary buydown and permanently lowering your interest rate depends primarily on your eligibility for the mortgage loan at the standard interest rate. Then, you’ll need to figure out how long you plan to own your home. Paying several thousand dollars that you can’t recoup due to selling your home in just a couple of years may not be the best decision.

Before deciding, it is important to assess both scenarios comprehensively to determine which option will be most advantageous for you in the short and long run. Your mortgage lender can help you identify the most cost-effective loan option for your home.

The bottom line on 2-1 buydowns

A temporary buydown can be a great option, but it’s far from your only option. Buying a home is one of the biggest investments you’ll ever make, so it’s important to understand all your choices.

For some, the tiered approach of a 2-1 buydown can be an ideal way for first-time homebuyers and others who want to “grow into” their mortgage payments. With the added savings, you may be able to take on home repairs or upgrades or set aside funds to prepare for the eventual increase to your payment.

Your loan officer can walk you through all your rate buydown options to help you decide which solution is best suited for you and your situation.

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