What is a 2-1 buydown?

How 2-1 Buydowns Work

In a 2-1 buydown, the interest rate will increase from one year to the next until it settles into its permanent rate in year three. To make up for the interest that they won’t be receiving in those early years, lenders will charge an additional fee.

Either a homebuyer or a home seller can pay for a buydown. That payment may be in the form of mortgage points or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments.

Sellers, including home builders, often use 2-1 buydowns as an incentive for potential purchasers.

Example of a 2-1 Buydown Mortgage

2-1 Buydown Scenario

Home’s Purchase Price: $750,000

Loan Amount: $600,000

Down Payment (20%): $125,000

MARKET RATE

Loan Amount $600,000
Principal and Interest at 6%* = $3,597/month principal and interest payment
*interest rates are shown for example purposes only – extreme market volatility – rates may vary; must call for an accurate rate

YEAR 1

Loan Amount $600,000
Principal and Interest at 4%* = $2,864/month principal and interest payment

YEAR 2

Loan Amount $600,000
Principal and Interest at 5%* = $3,221/month principal and interest payment

How The Fee or Buydown Cost Works

The total fee works out to $13,308, based on adding:
6% PI ($3,597) – 4% PI ($2,864) = $733 * 12 = $8,796
6% PI ($3,597) – 5% PI ($3,221) = $376 * 12 = $4,512
This fee will be paid by the seller.

2-1 Buydown Pros and Cons

For home sellers, a 2-1 buydown can help them by making it easier and sometimes faster for them to sell their homes for a good price. The downside, of course, is that it comes at a cost, which ultimately reduces how much they will net from the sale.

For homebuyers, a 2-1 buydown has several potential benefits. For one thing, it can help them afford a larger mortgage and a more expensive home than they might otherwise qualify for. For another, it buys them some time before their mortgage payments rise to the full amount, which can be helpful if their income is also rising from year to year.

The downside for homebuyers is the risk that their income won’t keep pace with those increasing mortgage payments. In that case, they might find themselves stretched too thin and even have to sell the home.

When to Use a 2-1 Buydown

Home sellers may want to consider offering (and paying for) a 2-1 buydown if they’re having difficulty selling and need to provide an incentive to find a buyer.

Borrowers may benefit from a buydown if it allows them to buy the home they want at a price they can afford. However, they will also want to consider what would happen if their income doesn’t rise fast enough to keep up with their future monthly payments.

Buyers should also make sure that they are getting a fair deal on the home in the first place. That’s because some sellers might increase the home’s price to make up for the cost of the 2-1 buydown.

Note that buydowns may not be available under some state and federal mortgage programs or from all lenders. A 2-1 buydown is available on fixed-rate Federal Housing Administration (FHA) loans, but only for new mortgages and not for refinancing. Terms can also vary from lender to lender.