WHAT IS THE 2-1 BUYDOWN MORTGAGE?
loans available with interest rate reductions during the first two years are called 2/1 buydown programs. This means your interest rate will drop by 2% in the first year, 1% in the second year, and return to the full interest rate by the third year.
Temporary rate buydowns are not new. With today’s higher interest rates, they are regaining popularity. The last time they were used was in the early 90’s. It is actually a fixed-rate mortgage where a portion of the payment is prepaid for two years. The rate itself never changes.
A buydown is a real estate financing method that makes it easier for a borrower to qualify for a mortgage with a temporary lower interest rate. That lower rate will last for a specific period of time.
A 2-1 buydown is an agreement that offers a low interest rate for the first year of the loan, a somewhat higher rate for the second year and the full rate for the third year there out. The interest rate on a 2-1 buydown would be 2% below the note rate for the first year, 1% below the note rate for the second year and years three through 30 would be at the note rate. A 2-1 buydown can be paid for by the buyer or the seller can pay for it as a seller concession.
Think of it as the buyer asking the seller for closing cost. Closing cost is what the buyer has to pay for the loan and escrow fees. Most of the time buyers will ask for 3% of the sale price. So for a sale price of $500,000, the buyer is asking for $15,000 from the seller. The money is deposited into escrow to be used at close of the transaction. The 2-1 buydown amount is based on the loan amount, current interest to be used.
Not everybody will be able to use the buydown program. No matter your situation, check with your lender. If your lender can’t do the program, call around, because another lender might. Mortgage lenders will be your best bet, instead of large banks.