2-1 Buydown Loan: What is it, how does it work, and who does it benefit?
The current rise in interest rates has created a large affordability issue when it comes to buying a home. As a result, temporary buydowns have become an option that some buyers and sellers are considering.
A 2-1 buydown is a mortgage lending program that offers a lower mortgage payment during the first two years of the loan term. That means for the buyer, interest rates are two percentage points below the note rate in the first year, and one percentage point below in the second year. For the remainder of the term, the payment will be based on the original interest rate on the loan.
A temporary buydown is available for primary and secondary home purchases, and with conventional, FHA, and VA loans.
This program is possible because the seller or builder funds the buydown. The funds are collected at closing, placed in an escrow account, and used to make the full interest rate payment each month.
This is a great program for homebuyers because it offers them the opportunity to purchase a new home at a more affordable cost giving them two years to make lower mortgage payments. Typically the first two years are the most expensive with closing costs, furnishing the house, and repairs or projects that may be needed, so a 2-1 buydown helps ease them into the full payment.
However, the buyer still has to qualify for making payments based on the original payment amount for the original note rate. Regardless of whether you are paying 2% and 1% below the note rate, the bank needs confirmation that you will be able to afford the mortgage for its full interest payment in the third year.
If you are looking to purchase a new home and are interested in easing into your mortgage payments, contact one of our expert loan officers to learn more.