A 2-1 buydown is a program in which a home buyer, seller and/or builder pays to reduce the buyer's mortgage rate temporarily, making the first two years of homeownership more affordable.
Rates could come down.
This is perhaps the biggest drawback of 2-1 buydown mortgages when you utilize them when interest rates are high. If rates come down, your locked rate could be much higher than the new current market rate, meaning an ARM would have been a better choice.
Buydown Costs = Unpaid Interest
The cost of the 2-1 buydown is the sum of the unpaid interest for the first two years. Over the first two years, Joe has “saved” $9,323.18 ($6,167 + $3,156) of interest. This amount is the total amount the seller has a requirement to pay at closing to secure the 2-1 buydown.
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.
One common question borrowers have is, “Can you refinance after a 2-1 buydown?” The answer is yes; refinancing is possible and can be a beneficial option for many borrowers.
First of all, offering a seller credit for a mortgage rate buydown can help a homeowner attract more offers from buyers. This in turn can result in faster sale, which is usually one of the primary objectives for home sellers.
What is the Process of Getting a 2-1 Buydown? Once you know how much the 2-1 buydown will cost for your purchase, you will then ask for that amount as a credit from the home seller or builder. Depending on what loan program the buyer qualifies for, a seller can offer a certain amount in credits or concessions.
Consider the following example for a 30-year loan: On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.
Qualified borrowers could see a monthly mortgage payment of principal and interest between $3,043.80 and $4,029.80 for a $600,000 mortgage loan right now.
Buydown funds are not refundable unless the mortgage is paid off before all the funds have been applied. Buydown funds cannot be used to pay past-due payments. Buydown funds cannot be used to reduce the mortgage amount for purposes of determining the LTV ratio.
The 2-1 Buydown is ideal for those looking for short-term payment relief, while the Permanent Buydown offers long-term savings for those planning to stay in their homes for many years.
The ideal candidate for a 2-1 buydown loan may be someone who: Has a partner or spouse who is going to go back to work in the next two years. Wants to lower their monthly payment for the first two years of being a homeowner so they can pay for improvements or repairs.
By reducing the interest rate, buydowns offer lower initial payments, increased affordability, improved cash flow, and potential interest savings. However, it's essential to consider the disadvantages associated with buydowns, including higher upfront costs and potential negative equity.
The buydown funds may be provided by various parties, including the borrower, the lender, the borrower's employer, the property seller, or other interested parties to the transaction.
The borrower is required to pay 2 points on a $50,000 loan. A point is a fee equal to 1% of the loan amount. Therefore, 2 points on a $50,000 loan would be 2% of $50,000. Therefore, the borrower has to pay the lender $1,000 in points.
An amount paid to the lender, typically at closing, in order to lower the interest rate. Also known as “mortgage points” or “discount points.” One point equals 1% of the loan amount (for example, 2 points on a $100,000 mortgage would equal $2,000).
Generally, buying four mortgage points will lower your interest rate by 1 percent. That's also the maximum number of points most lenders will let you purchase. If you don't pay off your loan early, you'll eventually save more in interest than you spent upfront.
Borrowers can pay for a 2-1 buydown, but sellers, including home builders, also may offer a 2-1 buydown to make a property more attractive. These transactions can be a good deal for homebuyers if they can afford the higher monthly payments that will begin in year three.
The buydown interest percentage is the total of the interest for both years. That is, the buydown is 2% in the first year and 1% in the second year, for a total of 3%. The formula for calculating buydown points is: buydown points = (loan amount x percentage) / 100.
Who Pays for a Buydown? Pretty much anyone involved in the process of buying or selling a home can pay for a mortgage buydown—including the seller, the buyer or even a builder. Sometimes, a seller will offer to pay for a buydown so their listing will have a little icing on the cake.
Option 1: Permanent Mortgage Rate Buydowns
Each discount point reduces the rate by about 0.25 percentage point, depending on the lender, and costs 1% of the loan amount.
A higher down payment shows the seller you are motivated—you will cover the closing costs without asking the seller for assistance and are less likely to haggle. You are a more competitive buyer because it shows the seller you are more reliable.
For example, a mortgage lender may offer a borrower the ability to reduce their interest rate by . 25% in exchange for a point. So, if the borrower is obtaining a mortgage for $400,000 and is offered an interest rate of 4%, paying $4,000 would lower their interest rate to 3.75%.