By Bill Lyons | Published on June 21, 2023
TABLE OF CONTENTS
A 2/1 buydown mortgage is a type of mortgage that allows the borrower to reduce the amount of interest paid during the first two years of the mortgage. It’s similar to buying points that reduce the interest rates but typically lasts for a period of two years.
You could potentially save a lot on interest and enjoy a lower monthly payment over the life of the mortgage with a 2/1 buydown.
The mortgage gets its name from the fact that the interest rate is 2% lower in the first year, 1% lower in the second year, then goes back to the original interest rate in the third year. It’s classified as a seller’s concession as it’s typically offered by the seller to attract a buyer.
Our 2/1 buydown calculator can help you determine if a temporary buydown mortgage makes sense for your next home purchase.
By inputting information like the type of buydown (3-2-1, 2-1, or 1-0), the length of the mortgage, the total loan amount, and the interest rate, the calculator can estimate your mortgage payment for the first and second years as well as the monthly payment that you’ll pay for the remainder of the mortgage.
Learn more about how this type of loan works, and use our calculator to see if it’s a good alternative for you.
KEY TAKEAWAYS
- 2/1 buydown mortgages allow borrowers to enjoy lower interest rates for the first two years.
- With a 2/1 buydown loan, you can save on your overall mortgage costs.
- A 2/1 buydown loan can be a good opportunity for borrowers who are in a financial position to be able to afford a higher interest rate in the third year of the loan and beyond.
What Is a 2/1 Buydown?
A 2/1 buydown can be used on a DSCR loan, VA loan, or Conventional loan, known as a mortgage buydown. This home financing option is available when a seller or home builder wants to stimulate interest among buyers–often when sales are slow.
The 2/1 is similar to buying points upfront to reduce the interest rate, but the difference is that the interest rate returns to normal when the third year of the mortgage starts. After the two-year period of lower interest expires, the rate stays the same for the life of the loan unless the borrower refinances.
The seller puts money from the sale of the home into an escrow account to cover the reduced payments for the first two years of the loan until the two-year period of reduced interest expires.
It’s worth noting that the offer has to be extended by the seller, and the borrower can only ask if the seller would consider entering into a 2/1 buydown mortgage. This is due to the fact the seller has to fund the escrow account that pays the lender for the reduced payments.
The mortgage statement shows the full payment, then breaks down how much the borrower and seller have to pay to complete the mortgage payment.
The buyer is presented with a monthly mortgage payment during the loan origination process. On a 2/1 mortgage, the payment doesn’t change per the contract. Instead, the seller agrees to pay the balance of the payment after the interest rate reduction.
For example, a 2% reduction on a $1,000 payment totals $20. The buyer pays $980, and the seller covers the remaining $20.
When looking at adjustable-rate vs. fixed-rate mortgages, a 2/1 can be more advantageous because there’s an upfront discount of interest, and the option to refinance at a lower rate at a later point in time is preserved.
How Much Does it Cost to Buy Down Your Interest Rate?
Another option for a mortgage buydown is to purchase points when you initiate your mortgage. So, how much does it cost to buy down your interest rate? The actual amount you pay depends on the size of your loan, but you can expect to pay an estimated 1% of the loan amount to buy a 0.25%~ reduction of your interest rate.
With our buying down interest rate calculator, you can estimate the cost of buying down a point.
The calculator uses the home’s purchase price to determine how much it would cost to buy discount points. Each point you buy down equals 1% of the loan amount. So, in theory, it would cost $2,000 to buy one point of interest on a $200,000 mortgage.
How to Calculate a 2/1 Buydown
Calculating a 2/1 buydown is straightforward, especially with our 2/1 buydown calculator. To start the calculation, you’ll need the following information:
- Loan amount
- Buydown interest percentage
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.
For example, you’re buying a home for $200,000, and the total buydown is 3%. The formula would look like this:
Buydown points = (200,000 x 3) / 100 = $6,000
In this instance, the seller would need to put $6,000 into an escrow account to cover the reduced payments.
Alternatively, you can use our 2/1 buydown calculator to quickly do the math and get a more accurate idea of the cost of a 2/1 buydown.
How Does the 2/1 Buydown Calculator Work?
The 2/1 buydown calculator uses the written formula and inputs but calculates it more quickly than if you were to do it by hand. The calculator asks for inputs that include:
- Buydown type: Buydown calculators often ask if the buydown type is a 1/0, 2/1 or 3/2/1. You’ll need to select 2/1 to get the correct number if a 3/2/1 buydown isn’t being offered.
- Loan amount: The purchase price of the home less the down payment.
- Interest rate: The rate that’s being offered in the mortgage.
- Loan term: The length of the mortgage (15 or 30 years on average).
You can get an idea of how much the seller would need to fund for the buydown and use the information as part of your negotiations. The buydown calculator can be more granular in that it includes inputs such as property taxes and insurance to help you better understand the total monthly costs you can expect to pay.
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Is a 2/1 Buydown Mortgage a Smart Choice?
The 2/1 buydown mortgage can be a smart choice as long as you feel you can afford the payments after the two-year period of reduced interest has expired.
You get two years of reduced payments, which allows you to use the money for savings, make necessary purchases, or buy something nice for your new home. This type of mortgage can also help you qualify for a larger loan amount than you would otherwise be offered.
The major drawback of a 2/1 buydown mortgage is the fact that it has to be offered by the seller because they fund the portion of the payment that’s not being paid by the borrower. The implication for the seller is that they get less money for the sale of their home.
However, if their home isn’t selling quickly, the 2/1 mortgage is an incentive to get the home sold closer to their desired price point. A buyer can introduce it as a seller concession during the negotiation process.
As a borrower, you need to be prepared for your mortgage payment to grow in the second and third years of the mortgage. The first year has the lowest payments, the second year is larger, and the buyer has to resume paying the full amount in the third year.
This boils down to setting up a financial plan for making the larger payments after 24 months have passed since the purchase.
Using a 2/1 buydown calculator can help you determine if the 2/1 mortgage makes sense for your budget and the home you have your eye on. As with any mortgage program, whether the advantages and disadvantages outweigh one another will depend on your circ*mstances.
If you determine that a 2/1 buydown isn’t right for you, there are many other types of mortgage programs– including interest-only loans or bank statement loans–available that may offer distinct advantages for you. Speaking with a loan specialist can help you come to the right decision.
Use Our Free 2/1 Buydown Calculator
At Griffin Funding, we’re here to help you look at the pros and cons of a 2/1 buydown mortgage. Start with our free buydown calculator, so you can get an idea of how much you’ll save with a 2/1 buydown mortgage. If you’re considering it as a viable option, one of our loan experts can walk you through your mortgage options. Temporary buydowns are a very popular option for home buyers in today’s market as interest rates on conventional loans are approaching 8%.
Call us at 858-698-1098 or request a quote online today. We offer a variety of conforming and non-conforming mortgages that are designed for borrowers across the spectrum of financial circ*mstances. Together, we’ll secure a mortgage that meets your needs and sets you up for success as a new homeowner.
Bill Lyons
Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.
