A 2/1 buydown is a type of mortgage financing that lowers the interest rate on a loan for the first two years. The rate is typically two percentage points lower during the first year and one percentage point lower in the second year. After the two years are up, the interest rate increases to the permanent rate.
2/1 buydowns can be paid for by the homebuyer or the home seller. Sellers often offer buydowns as an incentive to buyers, especially in a competitive market.
To understand how a 2/1 buydown works, let’s say you qualify for a $300,000 mortgage at a 5% interest rate. Your monthly payment would be $1,538. If you choose a 2/1 buydown, your interest rate would be 3% for the first year and 4% for the second year. Your monthly payments would be $1,237 in the first year and $1,338 in the second year. After the two years are up, your interest rate would increase to 5% and your monthly payments would increase to $1,538.
2/1 buydowns can be a good option for homebuyers who are struggling to afford a monthly mortgage payment. They can also be a good option for buyers who plan to sell their home within a few years, as they can sell the home with a lower interest rate, which can make it more attractive to buyers.
However, it’s important to note that 2/1 buydowns are not a free lunch. The cost of the buydown is typically factored into the loan amount, so you’ll be paying interest on the buydown amount for the life of the loan. Additionally, if you sell your home before the two years are up, you may have to pay back a portion of the buydown to the lender.
If you’re considering a 2/1 buydown, it’s important to talk to a mortgage lender to understand the costs and benefits involved.