Offset the upfront 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 in the first two years of your loan, making home ownership more accessible now.
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What is a 2-1 Buydown?
You have several options when choosing the right loan to buy a home affordably. 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, and it’s available with several types of loans.
In the first year, you pay an interest rate that is 2% lower than your standard rate. In the second year, you pay an interest rate that is 1% lower. By the third year, you begin to pay the full interest rate that was agreed upon when you closed your mortgage.
To make this possible, points (sometimes called “discount points”) are paid as an upfront cost at closing to make up for the difference in interest payments for the lender. These funds are 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 upfront 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 upfront.
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 upfront 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, connect with us. 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 —possibly with a conventional, FHA or VA loan— as well as use the buydown option to lower your first two years of interest costs.
To do this, an upfront cost will need to be paid either by you, the seller or the builder (for new construction homes). It can be paid as points or as a lump sum deposited into an escrow account, which the lender relies on to make up the difference of the lower interest you pay for the first two years of your loan.
To get started, you’ll share basic information about your potential home purchase and needs. We’ll work with you to access your credit report and discuss your financial situation to find the best loan option.
We’re with you through each step to help you purchase your home with affordable financing.
Requirements for a 2-1 buydown
These are some of the common requirements 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 your 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 your debt-to-income ratio (known as DTI) will be considered. DTI shows how much of your monthly income goes to paying your debt.
- The 2-1 buydown must be used to purchase a home using a fixed interest rate loan.
- Beyond covering the upfront cost of the buydown, you may also need to pay for a down payment, closing costs and mortgage insurance depending on the specifics of your loan.
2-1 Buydown FAQs
Financing a home is an important investment. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to contact us to ask more.
What type of loan can I use a 2-1 buydown for?
A 2-1 buydown applies to most purchase loans, including conventional, FHA and VA loan programs. It does not, however, apply to refinance loans.
To apply a 2-1 buydown to your loan, your mortgage also needs to have a fixed interest rate. It doesn’t apply to adjustable rate mortgages (ARM) because rate adjustment is already a feature of that kind of mortgage.
Who can benefit from a 2-1 buydown?
A 2-1 buydown can be beneficial for both the homebuyer and the seller or builder.
Homebuyers can gradually work their way up to affording a full monthly mortgage payment, allowing for flexibility with cash flow and offsetting the initial costs of buying a home. If you want to afford a home with a larger loan that you know you will be able to afford long-term, this makes it possible.
Sellers may also want to offer a 2-1 buydown as a concession to homebuyers because it can incentivize buyers and allow the home to sell more quickly without lowering the listing price. Builders may also offer it to ensure the newly constructed homes they’ve invested in get purchased and filled with residents.
Are there downsides to consider with a 2-1 buydown?
There are a few risks to be aware of with a 2-1 buydown. First, it involves an upfront cost to cover the interest you won’t be paying monthly in the first two years. If this cost can be covered by the seller or builder, this won’t be an issue for you.
This upfront cost is paid into an escrow account. If for some reason there are issues with that account and payment doesn’t get sent to the lender, it’s your responsibility to cover the costs.
You also want to make sure that when your interest rate reaches its full amount, you will have enough income in the third year to continue to afford your mortgage with its full monthly payment amount.
Are there other programs that make buying a home more affordable initially?
There is a variety of loan options that can make buying a home as affordable as possible to meet your needs and financial situation. Each loan type offers its own benefits such as lower down payment amounts and flexible qualification requirements.
You may also qualify for down payment assistance or no down payment at all, or you may be eligible to use a gift down payment.
When it comes to lowering your interest rate, there are also other buydown options that impact how many percentage points your interest rate is lowered and for how long, all of which come with their own upfront costs.
We can help you understand all of your options and resources for making your home purchase affordable.
Are there other upfront costs when getting a mortgage besides the cost of a 2-1 buydown?
Depending on your purchase loan, you may need to account for other costs, both upfront and those included in your ongoing monthly payment. These will be clearly outlined as your loan is processed and before you close.
Beyond the initial 2-1 buydown cost, you may also need to make a down payment, which can be anywhere from 3-20% of the home price.
You’ll also need to pay closing costs, which cover expenses such as loan origination fees, an appraisal, upfront mortgage insurance, title insurance and similar kinds of charges. Closing costs typically range from 1-3% of your total loan amount.
Certain purchase loans offer options to help you afford these costs, including FHA and VA loans.
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