How To Get a Lower Rate: What Is a 2-1 Buydown?

A 2-1 buydown is a type of mortgage financing option in which the borrower receives a temporary reduction in their interest rate for the first two years of the loan. The interest rate is then increased in the third year, and remains fixed for the remainder of the loan term.

In a 2-1 buydown, the borrower pays an initial lump sum to the lender, which is used to “buy down” the interest rate for the first two years of the loan. The amount of the lump sum is typically calculated as a percentage of the loan amount, and can vary depending on the specific terms of the buydown.

For example, suppose a borrower is applying for a 30-year fixed-rate mortgage with an interest rate of 4.5%. With a 2-1 buydown, the borrower might pay an upfront fee of 2% of the loan amount, which would lower the interest rate to 2.5% for the first two years of the loan. After that, the interest rate would increase to 3.5% for the remaining 28 years.

The benefit of a 2-1 buydown is that it allows borrowers to enjoy lower payments during the first two years of their mortgage, which can help make homeownership more affordable. It can be particularly helpful for borrowers who are expecting their income to increase in the coming years, as they can take advantage of the lower payments while they are still establishing themselves financially.

However, it’s important to note that a 2-1 buydown may not always be the best option for every borrower. Borrowers should carefully consider the costs and benefits of the buydown, as well as their long-term financial goals, before deciding whether this type of financing is right for them.