Have you heard of a 2/1 buydown? Do you know what it does and how it works?
You may not have heard much about buydowns over the last few years. When interest rates are low, many people are content with the rate they negotiate without having to look for ways to lower it further.
But these days, borrowers are actively looking for ways to lower their mortgage payments, and the 2/1 buydown program may be a great way to accomplish that goal.
What Is a 2/1 Buydown?
A 2/1 buydown program is a financing option that offers a lower interest rate for the first two years of your mortgage term.
When you choose this program, your interest rate will be 2% lower in the first year of your mortgage and 1% lower in the second year. As the mortgage term enters its third year, the mortgage rate will increase to the original rate on the loan.
The benefit is that you will have paid lower mortgage payments for the first two years of having the loan, and may make it easier to afford a home.
Important Details
A 2/1 buydown program is also called a temporary buydown because the initial interest rate is temporary. In this scenario, the interest rate increases yearly until it reaches its permanent interest rate in year three of the mortgage term.
With a Gulf Coast Bank & Trust Home Loans buydown, the seller pays for the buydown.
The payment occurs as a lump sum deposited into escrow. The lump sum deposited into escrow with the loan servicer is used to subsidize the borrower’s lowered monthly payments. Sellers, and some home builders, will sometimes use 2/1 buydown programs as an incentive to attract buyers to their property.
Pros and Cons of a 2/1 Buydown
First, it should be clearly understood that a 2/1 buydown is temporary.
Initially, it can seem like a pro that you are paying a lower interest rate and, therefore, a lower monthly payment for those first two years. However, being ready for the higher payments in that third year is a must.
And remember, you always have the option of refinancing your loan at any time should interest rates go down and you meet qualifying credit criteria.
Find Out if a 2/1 Makes Sense for Your Needs
Buydowns and variable interest rate loans may have many benefits to buyers including a lower mortgage payment. If you are ready to find out if this program makes sense for you: contact one of our mortgage lenders at a branch near you to start the process of getting pre-qualified!
Our lenders will discuss your goals with you, educate you on your options when it comes to a home loan, and help you get pre-qualified for a loan so you know exactly what you might qualify for - whether that’s a 2/1 buydown, fixed-rate conventional loan, FHA loan or any of the other home loan products we offer!
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FAQs
A 2/1 buydown program is a financing option that offers a lower interest rate for the first two years of your mortgage term. When you choose this program, your interest rate will be 2% lower in the first year of your mortgage and 1% lower in the second year.
What is the downside of a 2:1 buydown? ›
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.
Is a 2:1 buydown refundable? ›
Except as otherwise provided in this agreement, the buydown funds are not refundable. The Borrower's only interest in the buydown funds is to have them paid over and applied to payments due under the Note along with payments made by Borrower.
Is a 321 buydown worth it? ›
A 3-2-1 buydown mortgage can be a good deal for the homebuyer, particularly if someone else, such as the seller, is paying for it. However, buyers need to be reasonably certain that they'll be able to afford their mortgage payments once the full interest rate applies from the fourth year onward.
Can you refinance out of a 2:1 buydown? ›
Refinancing is often used to secure a lower interest rate when market rates dip. It can also be used to cash out some of your home equity. You may be able to refinance your 2-1 buydown loan as long as the refinancing requirements relating to credit, income, equity, and payment history are met.
Who benefits from a 2:1 buydown? ›
For some, the tiered approach of a 2-1 buydown can be an ideal way for first-time homebuyers and others who want to “grow into” their mortgage payments. With the added savings, you may be able to take on home repairs or upgrades or set aside funds to prepare for the eventual increase to your payment.
How much does a 2:1 buydown cost the seller? ›
On a 2/1 mortgage, the payment doesn't change per the contract. Instead, the seller agrees to pay the balance of the payment after the interest rate reduction. For example, a 2% reduction on a $1,000 payment totals $20. The buyer pays $980, and the seller covers the remaining $20.
What happens to unused buydown funds? ›
And here is even better news: The money for the temporary buydown goes into an escrow account and is applied to your loan every month during the buydown period. If you refinance or sell during that period, the unused portion gets applied to your home loan, reducing the balance of your loan.
What is the qualifying rate for a 2-1 buydown? ›
If you qualify for a 2-1 buydown, your interest rate would drop 2% in the first year to 4.5%, and 1% in the second year to 5.5%. In the third year, your approved 6.5% rate becomes effective.
How does a 2-1 temporary buydown work? ›
The 2-1 Temporary Buydown reduces the buyer's interest rate by 2% for the first year of their loan and 1% for the second year.
Conclusion: If rates drop only one point after two years, paying points will save you $77,473 over the 2-1 Buydown. No one knows the future of interest rates. This is why we believe that the 2-1 Buydown is risky. You should only do it if you're comfortable with the rate set for years 3-30.
Does a 2:1 buydown require extra funds at closing? ›
Does a 2-1 Buydown Require Extra Funds at Closing? Yes, you will need to provide extra funds at closing to cover the cost of the buydown. This is an upfront fee that pays for the reduced interest rates in the first two years.
Should I pay to buy down my interest rate? ›
Whether you should buy down your interest rate depends on the break-even point and the savings that come with it. Your break-even point is the number of years, months, or mortgage payments it will take before buying mortgage points is worth it.
What are the downsides of a 2-1 buydown? ›
While you do need to be approved for the actual interest rate and payments with a 2-1 buydown, if you get used to the lower payments in year one—and even in year two—it can be hard to adjust your spending levels when your payments rise in the third year, putting you at risk of overspending or not being able to afford ...
What is an example of a 3 2-1 buydown? ›
Let's assume we have a $100,000 loan and the market rate is 6.5%. With a 3-2-1 buydown, the borrower would have a 3.5% rate in year one of the mortgage; a 4.5% rate in year two of the mortgage; a 5.5% rate in year three of the mortgage; and a 6.5% (the assumed market rate) thereafter.
How many points can you buydown a mortgage? ›
How many points can you buy down the interest rate? There is no set limit for how many mortgage points you can purchase, but most lenders limit borrowers to four points. Due to state and federal limitations, there are restrictions on the amount a borrower can pay in closing costs on a mortgage.
How does a 2-1 buydown affect the seller? ›
For sellers, a 2-1 buydown can attract more offers at higher prices and get their homes sold faster. In turn, this could lead to higher net proceeds for the seller. Buyers can afford more if sellers make concessions to help reduce the loan cost and the monthly mortgage payment for the buyer.
How does a 2-1 buydown loan work? ›
A 2/1 buydown program is a financing option that offers a lower interest rate for the first two years of your mortgage term. When you choose this program, your interest rate will be 2% lower in the first year of your mortgage and 1% lower in the second year.
Who pays for a 3 2-1 buydown? ›
A 3-2-1 buydown can be paid for by the seller, homebuilder, or even the mortgage lender. This is a popular concession among sellers who are eager to sell for one reason or another. It often allows them to achieve the full asking price on their home, while also incentivizing buyers to invest in real estate.
