2-1 Buydown Loan

What is a 2-1 Buydown Loan?

A 2-1 Buydown Loan is a type of mortgage that allows borrowers to qualify for a home loan with a reduced monthly payment for a pre-determined period (for a 2-1 buydown, the monthly payment is reduced for the first 2 years of the loan).  This is a loan feature known as a 'temporary buydown' (as opposed to paying discount points, which results in a 'permanent buydown'). Payments are reduced by temporarily lowering the interest rate. This loan program "buys down" the interest rate of the loan, providing a discounted interest rate for the borrower during the first two years of repayment.

Once the introductory period expires, the interest rate will gradually increase until it reaches the regular market rate. This is done in a series of increments, by increments of 1% per year until the market rate is reached. The borrower is then obligated to repay the loan at the increased rate.

Here's how the numbers work:

For a temporary buydown, the numbers on the buydown represent the note rate reduction and the period of time the rate is reduced.  For example:

Using a note rate of 6%, a 2-1 buydown results in a monthly payment based on a 4% in year one (2% below the note rate, or the '2' in the 2-1), 5% in year two (1% below the note rate, or the '1' in the 2-1), and then the loan reverts to the full 6% note rate payments for the remainder of the loan.

Using the same note rate, a 1-0 buydown would result in payments based on a 5% in year 1, then update to payments based on the full note rate for the remainder of the loan.

A 3-2-1 buydown?  Same premise.  A payment in year 1 based on a rate 3% below the note rate, based on 2% below note rate in year 2, 1% below note rate in year 3, then the full note rate for the remainder of the loan.

The cost of a temporary buydown increases with longer periods of a reduced rate.  So a 1-0 buydown is typically the cheapest product up front, with a 3-2-1 buydown typically being the most expensive.

Who is eligible for a 2-1 Buydown Loan?

Any borrower who needs assistance qualifying for a home loan can apply for a 2-1 Buydown Loan. This loan program is particularly beneficial for first-time homebuyers or anyone seeking a temporarily reduced payment. It's an excellent option for individuals who anticipate a higher income in the future, as they can take advantage of lower payments in the first two years and generate much-needed savings.

What are the benefits of a 2-1 Buydown Loan?

The primary benefit of a 2-1 Buydown Loan is the lower monthly payment during the first two years. This loan program gives borrowers an opportunity to settle into homeownership and establish financial stability without facing the initial burden of high payments. Reduced monthly payments free up cash flow each month, making it an excellent option for individuals who need to save money or have limited funds.

Another benefit of a 2-1 Buydown Loan is the ability to qualify for a more substantial loan. By reducing the interest rate, borrowers can obtain a larger loan amount than they might have otherwise qualified for. Since the initial two years of lower payments allow the borrower to build a stronger credit score, the individual is in a better position to qualify for refinancing or to adjust the loan after the initial two-year period.

A final important consideration for a 2-1 buydown, is that if your loan is paid in full before the time period that the rate is discounted comes to an end, the remaining balance of the buydown funds is applied to the principal balance of your loan.  This is a great benefit compared to a 'permanent buydown' because with a permanent buydown, if the loan is refinanced or paid off early, any funds that were spent to buy the rate down are unable to be recouped.

What are the requirements for obtaining a 2-1 Buydown Loan?

To obtain a 2-1 Buydown Loan, you must meet the standard requirements for a mortgage loan. The 2-1 buydown is a loan program feature/option, NOT a program in and of itself, so borrowers only need to meet standard program qualifications.

A 2-1 Buydown Loan  requires the same level of documentation that standard loans require.  One thing that is different about a 2-1 buydown is that the buydown cost is paid by someone other than the borrower.  It can be paid by various parties, but not the borrower - so a seller credit, builder credit, Realtor credit, or lender credit can cover the cost, but the borrower should not pay the buydown cost directly.