2-1 Buydown Loan

What is a 2-1 buydown?

A 2-1 buydown is a temporary reduction of your mortgage rate for the first two years of the loan. Your rate is lowered by 2 percent in the first year and by 1 percent in the second year, then returns to the full note rate from year three onward. It is a way to ease into your payments with lower costs early on, while your permanent rate stays the same underneath.

How does a 2-1 buydown lower my payment?

The savings come from an escrow account funded up front at closing. That account covers the difference between your reduced payment and your full payment during the first two years. In year one you pay as if your rate were 2 percent lower, in year two as if it were 1 percent lower, and in year three you begin paying the full note rate. Nothing about your actual loan rate changes, the escrow simply subsidizes the early payments.

Who pays for a 2-1 buydown?

In most cases the seller or builder pays for the buydown as a concession to help close the sale. This is why buydowns have become popular, a seller can offer a buydown instead of cutting the price, which often makes the home more affordable in the early years while keeping their net similar. In some cases a buyer or lender can fund it. We help you structure the request as part of your offer.

Do I still have to qualify at the full rate?

Yes. Even though your payments are lower for the first two years, you must qualify for the mortgage at the full note rate, not the reduced rate. This protects you, because it means you are approved for a payment you can handle once the buydown ends and the rate steps up to its permanent level.

What happens if I refinance or sell during the buydown?

A: If you refinance or sell before the two-year buydown period ends, the unused portion of the escrow funds is typically applied to your loan or returned, rather than lost. Because the value of a buydown is greatest when you keep the loan through the full two years, it is worth planning around your expected timeline. We can walk through the math with you before you commit.

Is a 2-1 buydown right for me?

A 2-1 buydown works best when you expect your income to grow, you plan to stay in the home at least a few years, and you are buying from a seller or builder willing to fund it. If you expect to refinance very quickly, a permanent rate reduction or a price cut may serve you better. We compare the options so you can see which one actually saves you the most.