What Is a 2/1 Mortgage Buydown Mortgage?
A 2/1 mortgage buydown is a type of mortgage where the interest rate is temporarily lowered for the first two years of the loan. This results in lower monthly mortgage payments for the first two years, before adjusting to the original interest rate for the remaining life of the loan.
How Does a 2/1 Mortgage Buydown Work?
The 2/1 mortgage buydown works by having a third party, usually, the buyer, builder, or seller, pay a lump sum to the lender to reduce the interest rate for the first two years of the loan. This allows the borrower to have lower monthly payments for the first two years, before adjusting to the original interest rate for the remaining life of the loan.
Example
For example, a homebuyer may qualify for a 6% interest rate on a 30-year fixed-rate mortgage, but by paying a buydown fee of 2 points, they can temporarily lower their interest rate to 4% for the first year. In the second year, the interest rate increases to 5% and then for the third year to 6% for the remainder of the loan term.
Advantages of the 2/1 Buydown Mortgage
By obtaining a temporarily lower interest rate, buyers can save a significant amount of money in the first two years of their loan. This can be especially beneficial for homebuyers who are on a tight budget or who expect their income to increase over time. (Scheduled pay increase, obtaining an inheritance, etc.)
Another advantage of the 2/1 buydown is that it can help homebuyers qualify for a larger loan. Since the interest rate is temporarily lowered, the lender may be willing to approve a larger loan amount, which can be helpful for homebuyers who are looking to purchase a more expensive home. Keep in mind you can also refinance the loan if rates drop lower.
Disadvantages of the 2/1 Buydown Mortgage
One of the biggest drawbacks of the 2/1 buydown home loan strategy is that the interest rate will eventually increase. Homebuyers will need to be prepared for a higher monthly mortgage payment after the first two years of the loan. This can be a significant disadvantage for homebuyers who are on a tight budget or who expect their income to remain the same.
Conclusion
The 2/1 buydown home loan can be a great option for homebuyers who have felt locked out of the real estate market due to the recent rate hikes. Homebuyers should speak directly with a mortgage professional to explore if this is the past path to take exploring all options.