2/1 Buydown Program

One of the most talked about loan programs on the market is a 2/1 Buydown program. So, what is this 2/1 Buydown? Well, it is a simple concept, but the full details of the program are rather complex.

Some may think this is a new program that mortgage companies have come up with to combat inflation, but the program has actually been around for a long time. The best characteristic of the program is that it can be beneficial to both the buyers and the sellers.

We as local mortgage lenders want to make sure that our clients are well-informed about their mortgage options. It is a detailed industry that can be hard to navigate. Our Direct Lenders were strategically recruited as specialized individuals with many years of experience. We can help! Now, let's dig into the details of a 2-1 Buydown program.

Loan Officer Randy Bristol

Randy Bristol

Loan Officer

Ins and Outs of the 2/1 Buydown Program

What is the “2-1 Buy-Down”? 

Sounds simple, but there is a little more to it. The program is a mortgage lending technique that provides for lower mortgage payments during the first two years of the loan. No! We are not talking about adjustable-rate mortgage loans aka "ARMs". Additionally, this program is not in reference to buying a loan down with discount points. What we are dealing with here is a loan program where the seller typically supplements the buyers' payments for the first two years of the loan to give them the effect of having a lower interest rate.

How does it work?

In the first year of the loan, the buyer pays a principal and interest payment that is based on an interest rate that is 2% lower than the note (mortgage) rate. In the second year of the loan, the buyer pays a principal and interest payment that is based on an interest rate 1% lower than the note rate. The remainder of the buyers’ payments in the term of the loan would be based on the stated interest rate of the note.

Where Does the Money Come From for the “2-1 Buy-Down”? 

The “2-1 Buy-Down” is funded by cash generally provided by the seller or builder at closing (although they can also be funded by the buyer). The funds for the difference in the principal and interest payments for the two years of savings (in our example below, $6992.88) are collected at closing, placed in an escrow account, and drawn upon by the servicer of the loan to make up the full principal and interest payment of the note rate.

These funds, if paid by the seller are considered “Seller paid concessions” or “Seller paid closing cost” and would be listed on the contract as such. They are also calculated in the total allowable closing cost that are allowed to be paid by the seller. It can be further explained in special stipulations as “All parties agree that the seller contribution towards closing costs in item # 3 of the contract may be used at the buyer’s discretion towards closing costs, pre-paids and/or buydown costs.”

Who Benefits from the “2-1 Buy-Down”? 

Both buyers and sellers benefit from a “2-1 Buy-Down” in today’s market. In an environment where home sales have slowed, sellers can use a program like this one to help incentivize buyers to buy.

The benefit to buyers is clear. They are given a lower payment for two years. But it is especially appealing to buyers in today’s market where buyers would reap the benefits of a lower rate today while hopefully anticipating being able to refinance into a permanent lower rate down the road.

Note: A 2-1 Buydown may not be best for everybody, so make sure to speak to your Direct Lender.

2/1 Buydown Example

  • “2-1 Buy-Down” for $300,000 loan amount with note rate of 7%. 
  • In year 1 of the loan, the buyer would pay principal and interest at a rate of 5% (7%-2%). This equates to savings of $4625.40 for the first year!
  • In year 2 of the loan, the buyer would pay principal and interest at a rate of 6% (7%-1%). This equates to savings of $2367.48 for the second year! 
  • Total savings for the buyer during the “2-1 Buy Down” comes out to $6992.88!

Ready To Take The Next Steps

Interested in a 2-1 Buydown program? Then make sure to contact us today. We are always available to help inform and educate our clients, so they are able to make the best decision possible. Do not get discouraged by what you may hear in the news. Take the appropriate steps to make your dream of homeownership a reality.

Make sure to give us a call at (877) 455-0440 to get started with your loan application or continue to explore our website for some really great information about why we are the only lender for you.