2-1 Buydown Loan: What it is and How it Works

With the mortgage market shifting, we are adjusting and figuring out our options for purchasing a property. When looking for ways to make homeownership possible, one of the options is the 2-1 buydown loan.

This can be useful if you want the option of having lower monthly payments before the mortgage payments rise to the full amount. Additionally, this can also assist you when purchasing a larger mortgage than what you currently qualify for. 

2-1 buydown: What is it? 

In short, it’s an agreement that allows you to negotiate with the seller to buy down your interest rate for the first 2 years of your loan. 

This means that with this type of financing, you are able to get low-interest rates for a certain period of time.

How does a 2-1 Buydown Work?

Basically, the way a 2-1 buydown works is by allowing you to get qualified for a mortgage with low-interest rates. Let’s see a breakdown of this. 

During the 1st year

Here, the interest rate will be 2% lower than the market rate. 

The 2nd year

In the second year, the interest rate will be 1% less than the market rate. 

In the 3rd year

By this time, the interest rate will remain fixed at today’s market rate. It will remain like this for the remainder of the loan. If you refinance or pay off the loan before 2 years, then you will receive the remaining balance of the seller’s payoff reduction. 

Final Thoughts

As a buyer, with a 2-1 buydown, you can purchase the house you want at a price that you can afford. However, keep in mind that you will only have lower monthly payments for the first two years. 

Therefore, you should make sure that your income will cover the mortgage payments that you will have in the future.