What is a 2-1 Buydown?

A 2-1 buydown is a mortgage agreement option that allows you as a buyer to lower your interest rate for the first two years of your mortgage. Your interest rate is reduced by 2% in the first year and 1% the second. For the third year and beyond, your rate will go back to the note rate, or original interest rate. If rates go up, you are locked in at a lower rate. If rates go down, you have the option to finance at a lower rate.

How Does it Work?

A 2-1 buydown is possible when a builder, buyer, seller, or lender provides the funding, which has to be stated in the purchase contract. This is typically executed in the form of a mutually agreed upon closing cost credit.

This is something the real estate agent negotiates during the offer process. The funds to cover the “buy down” are collected during closing and put into escrow. Monthly payments are processed to make the full P&I (Principal and Interest) payment at the note rate.

Pros and Cons

There are many pros to a 2-1 buydown, mainly it allows home buyers to purchase a new home at a significantly cheaper monthly payment. It gives buyers a chance to ease into paying the note rate for the first two years while they are also paying for normal move-in expenses like security deposits, homeowners insurance, furniture, home upgrades and more. For sellers, these affordable monthly payments are covered from the proceeds of the sale and are a great incentive to people who are on the fence with buying a home. Having this option available makes it easier for sellers to list a better price as well.

An obvious con to a 2-1 buydown is that it is temporary. Keep in mind that your income must match the payment amounts needed in the third year.  A 2-1 buydown is most likely to happen in a buyers market, so it can be slightly more difficult to negotiate this in a sellers market. For sellers, although a great incentive, a buy down will decrease net proceeds from the sale.

How do I qualify for a 2-1 buydown loan?

Qualifying for a 2-1 buydown loan is simple. All it takes is that you have to be able to qualify for the loan at the current mortgage rate. As long as you qualify to buy the property without the 2-1 buydown, you will likely be eligible. It is also necessary that your DTI (debt-to-income) ratio does not exceed the loan requirements. If you are thinking about buying but concerned about high monthly payments or being able to afford move-in expenses, a 2-1 buydown can be for you!

Feel free to reach out to cam@csluxurygroup.com, (617) 869-1750, or message us on any social platform if you have any questions!