What is a 2-1 Buydown and why it may benefit you? 

What is a 2-1 buydown

The 2-1 buydown has been around since the 1990’s. It was introduced as a part of the affordable housing movement. The intention was to reduce a borrowers payment for the first few years so the borrower could ease into the new payment over the course on the the 2-1 buydown. It is also know as the 2 1 buydown.

So what is a 2 1 buydown?

In it’s simplest form any buydown is a concession, money given to the borrowers as a part of a real estate transaction. It is not much different from a seller paying all or a portion of your closing costs. It can also be known by several names. 2 1 temporary buydown, 2 1 buydown, 2-1 buydown program and other variations. It also comes comes in different term lengths, 3-2-1 buydown, 2-1 buydown and a 1-1 buydown. We’ll try to explain how it works in detail, if you need more information you may reach us on our contact us page.

Why you would want a 2 1 buydown?

Whether you’re a first time homebuyer or you’ve purchased multiple homes, the 2/1 buydown is beneficial to you if you can get a seller to offer it to you. When the real estate markets cool seller concessions like the 2-1 buydown become very popular. In a hot real estate market very few incentives are offered.

Essentially, you would want a 2-1 buydown simply because you’re getting a discount in the form of a concession. Interest rates have risen sharply recently, the 2-1 buydown is a great way to ease into your new home and new mortgage payment.

Is a 2-1 buydown a good idea? Anytime you getting a discount with no strings attached is a good option.

How does a 2-1 buydown work?

A 2-1 buydown works like this: When you purchase a home from a builder or a seller (most likely through a real estate agent), the seller has agreed to offer a concession in the form of a 2-1 buydown. The seller will subsidize your new mortgage payment for a period of two years. During the first 12 months your payment rate is reduced by 2% and during the second 12 months your payment rate will be reduced by 1%. The 2 1 buydown cost to the borrower is nothing, zero. It’s an incentive to entice you to purchase a home.

2 1 buydown example:

Let’s assume that today’s prevailing interest is 6.5%. That is the rate you’re being offered for a mortgage. When you close the transaction your new mortgage interest rate will be 6.5% The 6.5% rate never changes, it is the interest rate you’ll see on your mortgage statement from day one.

This is where people get confused. We know your interest rate is 6.5%, however, your effective payment rate will be equal to 4.5%, two percentage points less than your starting interest rate. The “payment rate” will be in effect for the first 12 months of the loan.

Using the same example above, your effective payment rate for months 13-24, the second 12 months will be equal to 5.5%. One percentage point lower than your interest rate.

When the 24 month period ends, you will now be making the true payment equal to 6.5%.

What is a 3-2-1 buydown?

A 3-2-1 buydown is similar to the 2-1 buydown. The only real difference is the buydown takes place over a 3 year period. The effective payment rate starts at 3% below your interest rate. Over the 3 year period the payment reduction goes from 3%, to 2%, to 1% and finally settles into your permanent interest rate.

3-2-1 buydown pros and cons.

Pros: The 3-21 buydown gives the borrower an additional 1%, lowering the payment rate for the first year by 3%. This can really help a potential homeowner afford the home while building their income.

Cons: The additional cost and added reduction to the payment causes the subsidy (Seller concession) to increase dramatically. It’s unlikely the seller will want to offer the additional year.


Conclusion for the 2-1 buydown:

You’ve just learned about the 2 1 or 2-1 buydown. The 2 1 buydown is a great way to ease into your home payments. The 2 1 buydown is beneficial for first time homebuyers. If you have additional questions regarding the 2 1 buydown, use our contact us page. 

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