A 2-1 Buydown is a mortgage lending program that provides for a lower monthly mortgage payment during the first two years of the loan term. In the first year, the principal and interest payment will be based on 2% below the note rate. The principal and interest payment will be based on 1% below the note rate in the second year. For the remainder of the loan, the payment will be based on the note rate (the actual interest rate on the loan). So for example, if the current note rate is 6.5%, the first year’s rate would be 4.5% then the 2nd year’s rate would be 5.5%. Then after the 2nd year, the interest rate goes to 6.5% and stays that way until the loan is paid off.
How is this possible?
The buyer, seller, and lender, can fund the buydown. In addition, the buydown cost can be split between different parties in the transaction. The funds are collected at closing, placed in an escrow account, and paid monthly to make the full principal & interest payment at the note rate.
What’s great about this program is that homebuyers can purchase a new home at a more affordable payment giving them two years to make lower mortgage payments and ease into the full payment based on the note rate amount. So essentially, homebuyers will get two years of lower payments.
The buydown program can be used for owner-occupied homes and second homes for purchases. However, borrowers cannot get cash out by using this program.
How is the rate determined on a 2-1 Buydown mortgage?
The rate is two percentage points lower than the note rate during the first year and one percentage point lower than the note rate in the second year.
Why are we seeing the 2-1 Buydown program now?
In a market where mortgage rates are rising, the 2-1 buydown benefits homebuyers by helping them afford a larger mortgage and a more expensive home. It is especially appealing to first-time homebuyers who may be having trouble purchasing a home in the current market. In general, the 2/1 buydown will be great for anyone with limited income for a short time but who anticipates their income to increase significantly by year three of the loan. For example, some highly prepared recent college graduates might have just enough savings to make lower payments for a couple of years before landing that higher-paying job. There may be several other situations where this format makes sense for those who expect their future income to rise.
In a buyer’s market, the 2-1 Buydown is often used to make it faster and easier for sellers to sell their homes at a reasonable price. The downside is that the funds the seller pays for the buydown come from the net proceeds of the home sale.
If you are interested in learning more about this program and to see if you qualify, please contact Manuel Lopez with West USA Realty today! You can reach Manuel at #602-790-3286 or email at email@example.com