Get a 2-1 Buydown Loan

A 2-1 buydown loan is a type of mortgage that includes an arrangement where the interest rate starts low and then increases over time. This can make the mortgage more affordable in the early years, potentially assisting borrowers who anticipate their income will grow in the future. The name “2-1 buydown” refers to how the interest rate changes: it’s reduced by 2% below the standard rate in the first year, and 1% below the standard rate in the second year. From the third year onwards, the interest rate is the standard rate agreed upon at the beginning of the loan.

Imagine you’re applying for a 30-year mortgage with a standard interest rate of 6%. With a 2-1 buydown, your interest rate would be 4% in the first year (2% less than the standard rate), 5% in the second year (1% less than the standard rate), and from the third year to the end of your mortgage term, the interest rate would be the original 6%. This can result in substantial savings in the early years of the mortgage, making it easier for you to manage payments.

It’s important to note that the “buydown” in a 2-1 buydown loan isn’t free. To get the reduced interest rate, an upfront payment is generally required, which can be paid by the borrower, the home seller, the builder (in case of a new home), or any combination of these. This upfront payment is called “buydown funds” or “points.” The cost of the buydown varies but it is typically calculated based on the difference between the standard and the reduced interest rates over the years of the buydown.

The 2-1 buydown loan can be especially beneficial to borrowers who expect their income to increase over time, allowing them to manage higher payments in the future, or those who need some initial financial flexibility. However, it’s crucial to carefully evaluate the upfront cost of the buydown and ensure it makes financial sense for your situation.

As with all mortgage options, it’s advisable to seek professional financial advice to fully understand the terms and implications of a 2-1 buydown loan and assess if it’s the best fit for your financial circumstances and homeownership goals.