What is a 2-1 buydown?

Looking to buy a home and need more flexibility with the upfront cost? A 2-1 buydown may be the solution.

A 2-1 buydown is when a lender agrees to lower the interest rate on your loan for a certain period of time. 

This can be a great way to save money on your mortgage, but it’s important to understand how it works before you decide if it’s right for you. 

Keep reading to learn more about 2-1 buydowns and whether they might be a good option for you.

How does a 2-1 rate buydown work?

A 2-1 buydown is when a borrower pays an upfront fee to lower their interest rate for the first two years of their loan.

A temporary buydown is a unique option for borrowers who wish to lower their interest rate during the initial years of their mortgage. 

By paying an upfront fee known as “buydown money,” these borrowers can enjoy a reduced monthly payment and an overall lower cost of borrowing in the short term. 

This does not necessarily guarantee lower payments in the long run, however. 

This strategy allows the borrower to pay a lower interest rate in the first two years of their loan only, which initially makes it more affordable. 

After that period, mortgage rates revert back to the standard market rate and remain at that level throughout the length of the loan. 

Buydowns are particularly useful when paired with adjustable-rate mortgages because they can reduce annual payment adjustments and provide stability by helping borrowers avoid sudden large jumps in payments due to changing interest rates.

A 2-1 buydown may also be particularly beneficial for those with larger loans or those who anticipate refinancing before the loan terms expire. 

By considering a 2-1 buydown on their loan, borrowers are given a range of options to save on their debt and make wise financial decisions for themselves. 

It’s important to know what you can afford before making an offer on a home so that you don’t find yourself stretched regarding your monthly mortgage payment. 

Sellers can also offer a 2-1 buydown to make a deal more enticing. The seller could pay off the buydown with the proceeds from the sale. This is a win-win for buyer and seller alike as the seller gets a quick sale, and the buyer benefits from a lower monthly payment.

2/1 buydown as a real estate financing technique

A 2/1 buydown is a type of financing arrangement in which the borrower pays an upfront fee, typically to the lender when taking out a mortgage. 

This fee is then spread out over the first two years of the loan’s life and reduces the borrower’s interest rate and monthly payments during that same period. 

For example, if the standard interest rate is 5%, a 2/1 buydown might reduce it to 3% for two years before returning to its original 5% rate in year three. 

Ultimately this structure allows someone with minimal cash resources to purchase a more expensive home, as they can pay lower mortgage payments in those initial two years while they build equity and make upgrades.

When does a 2-1 buydown make sense?

A 2-1 buydown is a way for new homeowners to save money in the short term. 

It’s typically used when buyers are not in the best financial situation and need to pay lower payments in order to afford the mortgage. 

By using this tool, a buyer can lock in the lower rate for the duration of usually three years while paying the additional difference between the higher rate and the lowered amount during this time. 

A 2-1 buydown potentially allows for lower monthly payments for a fixed amount. This can be beneficial for buyers who need cash upfront or who want to lock in their mortgage repayment schedule for the first few years. 

When assessing if a 2-1 buydown makes financial sense, it’s important to consider total costs incurred over time, including points associated with the original loan, as well as how long one plan on keeping the loan. 

Taking these figures into account should allow buyers to make an informed decision on whether or not it adds up to their benefit to pursuing an offered buydown option.

Qualifying for a 2-1 buydown

In order to qualify for a 2-1 buydown, a buyer must be able to qualify for a loan at the current market rate. 

For example, if you are applying for a 30-year fixed-rate loan and the rate is 6%, then you must also be able to qualify for the loan at that rate. 

Additionally, your debt-to-income ratio, credit score, and salary must meet the requirements of the lender for that specific loan. Typically a DTI of under 50% and a credit score of 720 or above are what lenders look for when approving a loan.

A 2-1 buydown loan can be a great solution for first-time homeowners looking to ease into making their first mortgage payments. It can also help buyers purchase a home in a hot seller’s market by providing a way to buy a more expensive home.

The savings bank by using the 2-1 buydown option can be used for home repairs and upgrades which help build equity and raise the value of your home.

Get an affordable mortgage with GO Mortgage

Overall a 2-1 buydown offers home buyers great flexibility with monthly payments and the type of home they want to buy.

Get started with the 2-1 buydown loan today.

The compassionate and experienced team at GO Mortgage can walk you through your options to find the best one for you.

Photo by Kindel Media