2-1 Buydown, what is it? You take your 30 year fixed market rate from today, you deduct 2% from your first 12 months of payment, then second 12 months, so by the 24 month, it changes to 1%.
So current market rate example is 6%. Go down 2% for your first 12 months. So you’d be paying at 4%. The following 12 months you’d be paying at 5%. The third year you go back to your fully fixed rate wherever you lock in at for the day.
So it is a chance for you to save money on interest for the first two years. You can refinance whenever you want. Take advantage of these savings for the next two years.
What is a Temporary Buydown?
Borrowers can reduce their effective monthly payments for a limited amount of time through a temporary buydown of the interest rate.
In a temporary buydown, a lump sum of money (or subsidy) is deposited into a buydown account. This subsidy is used to reduce the effective interest rate that a borrower pays during the early years of the mortgage. Each month of the buydown period, a portion of the subsidy is released to reduce the borrower’s payments. Various parties may provide the funds for the buydown. That includes but is not limited to the borrower, the lender, the seller, or the builder.
What is a 2-1 Buydown?
A common temporary buydown is a “2-1,” meaning the mortgage payment in years one and two is calculated at rates of 2 percent and 1 percent, respectively, below the loan rate. Due to the buydown subsidy being used to make up the difference, the actual note rate and the monthly payment the borrower is obligated to pay is never reduced. The full rate and payment must also be reflected on the mortgage documents. When the buydown period ends, the buydown funds that were collected at closing will have been exhausted.
How Much Does a 2-1 Buydown Cost?
A 2-1 buydown costs the difference between the standard mortgage payment and the reduction in payments for two years. The rate is reduced by 2% in the first year and 1% in the second year. The cost depends on the base interest rate and loan amount. For example, if the prevailing interest rate on a 30-year mortgage is 5%, a homebuyer could get a mortgage that charged just 3% in the first year, then 4% in the second year, and 5% after that.
The money paid towards a 2-1 buydown is put into an escrow account, which is then used each month throughout the two years of the buydown to pay the mortgage payment difference.
What is the Qualifying Rate On a 2-1 Buydown?
Any homebuyer or seller can qualify for a 2-1 buydown. Still, it is only available for new mortgages and fixed-rate Federal Housing Administration (FHA) loans, but not for refinancing.
How is a 2-1 Temporary
Buydown Loan Calculated?
In this example, the interest rate is 6% with a term of 30 years (360 months) and with a loan amount of $720,000. The P&I payment is $4,316.76.
For the first 12 months, the interest rate will be reduced by 2%, making the total interest rate paid by the borrower(s) 4%. The P&I payment changes to $3,437.39 per month, meaning the payment is reduced by $879.37 per month. For the year, the annual amount the payment was reduced is $10,552.44.
For the second 12 months, the interest rate will be reduced by 1%, making the total interest rate paid by the borrower(s) 5%. The P&I payment changes to $3,865.12 per month, meaning the payment is reduced by $451.64 per month. For the year, the annual amount the payment was reduced is $5,419.68.