2-1 Buydown

Offset the up-front costs of buying a home, maintain your cash flow and work up to the income that will make your long-term mortgage affordable by decreasing your initial interest rate.

A 2-1 buydown offers flexible financing options that allow you to lower your interest rate for  the first two years of your loan, making homeownership more accessible now.

What is a 2-1 Buydown?

You have several options when selecting  the best  loan for your financial situation and goals.  The 2-1 buydown option lets you lower your initial interest rate to make monthly mortgage payments more affordable in the first two years of paying your mortgage. This buydown is available in conjunction with multiple loan types. 

In the first year, you pay an interest rate that is 2% lower than your locked interest  rate. In the second year, you pay an interest rate that is 1% lower. By the third year, you begin paying the total interest rate that was agreed upon when you closed your mortgage.

How is this possible?  An up-front cost is paid at closing to make up for the difference in interest payments for the lender. This cost is known as “discount points”—or simply “points”—and is often paid into an escrow account that will be drawn from to cover the interest costs.

There are options for the seller to pay that up-front cost for you as a concession. This may happen if a seller is struggling to sell their home or wants to sell it quickly. The cost can also be covered by builders as an incentive for home shoppers to purchase their newly constructed homes. Another option would be to cover this cost yourself if you have the extra money up front. 

Let’s look at an example to see how much money a 2-1 buydown can save you:

Say you purchase a home for $315,790 with a 5% down payment. The $15,790 down payment lowers the loan amount to $300,000 with a 5.99% fixed interest rate and a term length of 30 years.

• If an up-front cost of 3 points is paid using 2-1 buydown, in your first year of monthly mortgage payments, your interest rate would be lowered by 2% for a total of 3.99%. Your monthly payment would be $1,431.
• In the second year, your interest rate would go up 1% to 4.99%. Your monthly mortgage payment would be $1,609 for the second year.
• Then finally in the third year, your interest rate would go up to its full amount of 5.99%, and your monthly payment would remain at its fixed amount of $1,797.

In the first year, you save $366 per month for a yearlong savings of over $4,000. In the second year, you save $188 per month for a yearlong savings of over $2,000.

A 2-1 buydown can make it easier to afford the home you love now, rather than waiting until your income increases. It gives you more flexibility with cash flow in the first two years of homeownership.

How to Get a 2-1 Buydown

To learn whether a 2-1 buydown is the best option to help you purchase a home, get in touch with us at Compass Mortgage. To get you started, we’ve outlined the steps and documentation needed to help you understand the process of getting a mortgage.

The Financing Process

Our 2-1 buydown program makes homeownership more easily accessible. As you shop for homes, we’re here to help you determine your financing options.

• We’ll help you understand if you can finance your home purchase with a long-term mortgage (Conventional, FHA or VA loan).
• We’ll help you consider the buydown option to lower your initial interest costs.
• For the 2-1 buydown, you, the seller or the builder (of a new construction) will pay an up-front cost.
• The up-front cost can be points or a lump sum deposited into an escrow account (for the lender to make up the difference of the lower interest you pay in the first two years of the loan).
• To get started, you share basic information about your potential home purchase and needs.
• We’ll work with you to obtain your credit report and discuss your financial situation to find the best loan option.

We’re with you throughout the entire process to help you purchase your home with affordable financing.

2-1 Buydown Requirements

These are some of the common requirements often needed to qualify for a 2-1 buydown. If you have questions about these requirements, we’re here to help.

• Credit Score. Requirements vary depending on loan type, the home value and other factors. (In many cases, the higher your credit score is, the better your loan terms will be.)
• Income and Debt-to-Income Ratio (DTI). Documentation will be required since these items are important considerations. (DTI shows how much of your monthly income goes to paying your debt.)
• Fixed-Rate Loan. A 2-1 buydown is available only with a loan which has a fixed rate of interest.
• Beyond the Up-Front Costs. You may also need to pay for . . . 
  • Down Payment
  • Closing Costs
  • Mortgage Insurance (depending on the specifics of your loan)