The benefit of a 2-1 buydown is that you have lower mortgage payments for the first two years of your loan, making it easier to afford a home. Knowing how much your payments will be in the first two years, and then comparing them to the payment you'll have in the third year and beyond, can provide invaluable insight.
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.
To subsidize the borrower's reduced monthly payments, it typically costs a percentage of the total loan amount to reduce the interest rate. For example, on a $500,000 loan with a 6% contracted interest rate, the total cost of the buydown for the first and second year would be about 2.2% of the loan amount.
A 2-1 buydown is a mortgage agreement that provides a low interest rate for the first year of the loan, a somewhat higher rate for the second year, and then the full rate for the third and later years. Borrowers or home sellers pay additional money upfront to earn the lower rate for those first two years.
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.
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.
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.
How many points can you buy down the interest rate? There is no set limit for how many mortgage points you can purchase, but most lenders limit borrowers to four points. Due to state and federal limitations, there are restrictions on the amount a borrower can pay in closing costs on a mortgage.
How does a seller-paid rate buydown benefit the seller? Raised interest rates can cause price reductions on a seller's home. A buydown is one way sellers can avoid this. It might be cheaper for them to help pay for mortgage or discount points instead of cutting the asking price of their home.
If you're buying a home and have some extra cash to add to your down payment, you could consider buying down the rate. This would lower your payments going forward.
Mortgage rate buydowns typically happen in one of two ways: The seller contributes to the buyer's closing costs via discount points, or the seller pays for a temporary rate buydown.
The party funding the buydown, whether it is the seller, builder or buyer, kicks in enough money to reduce the buyer's mortgage rate by 2% the first year and 1% the second year as part of that party's closing costs. The mortgage carries the standard rate and payment in years 3-30.
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.
Refinancing your 2-1 buydown could lead to lower payments, improved loan terms, or access to equity that might help you meet financial goals. But how do you know when it's the right time? In this article, we'll explore what a 2-1 buydown is, when it's a good idea to refinance, and the pros and cons you should consider.
Common buydowns.
1-0 Buydown - The lower interest rate lasts 1 year into the loan, after which the interest goes back to the regular contract rate. 2-1 Buydown - The lower interest rate lasts 2 years into the loan, but the discount changes.
A 2-1 buydown can help you purchase a larger property at a rate that can ease you into a larger payment. However, don't get starstruck by that Year 1 rate. Understand that this rate won't last forever, and by Year 2 it will be higher.
Buydown funds are not refundable unless the mortgage is paid off before all the funds have been applied.
A lender may allow borrowers to purchase as little as a fraction of a point or up to four points. One mortgage point typically costs 1% of your loan and permanently lowers your interest rate by about 0.25%. If you took out a $150,000 mortgage, for example, one point would cost $1,500 and get you a 0.25% discount.
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).
A mortgage point is equal to 1 percent of your total loan amount. For example, on a $100,000 loan, one point would be $1,000.