A 2-1 buydown is a mortgage agreement that provides a low interest rate for the first year of the l💝oan, a somewhat higher rate for the second year, and then the full rate for the third and later years. Borrowers or home sellers pay additional money upfront to earn the lower rate for those first two years.

How 2-1 Buydowns Work

A buydown is a real estate financing technique that makes it easier for a borrower to qualify for a mortgage with a lower interest rate. That lower rate can last for the duration of the mortgage (as is often the case when borrowers pay extra points up ront to the lender) or for a particular pe🎐riod of time. A 2-1 buydown is one kind of temporary buydown, in this case lasting for two years.

In a 2-1 buydown, the interest rate increases from one year to the next until it settles into its permanent rate in year three. Lender💯s charge an additional fee to compensate for the interest they won’t be receiving in those early years.

Sellers, including home builders, often use 2-1 buydowns as an incentive for potential p𓂃urchasers.

Example of a 2-1 Buydown Mortgage

Suppose a real estate developer offers a 2-1 buydown on its new home. If the prevailing interest rate on 30-year mo꧒rtgages is 5%, a homebuyer c🐠ould get a mortgage that charges just 3% in the first year, 4% in the second year, and 5% after that.

If the homebuyer took out a $200,000, 30-year mortgage, for example, their monthly payment would be $843 durin𒀰g the first year. In the second year𒁏, they would pay $995. After the end of the second year, their monthly payment would rise to $1,074, where it would stay for the remainder of the mortgage.

2-1 Buydown Pros and Cons

For home sellers, a 2-1 buydown can help by making it easier and sometimes faster ꧙to sell their homes for a good price. The downside, of course, is that it comes at a cost, which ultimately reduces their net profit from the sale.

For homebuyers, a 2-1 buydown has several potential benefits. It can help them afford a larger mortgage and a more expensive home than they might otherwise qualify for. It also buys them some time before their mortgage payments rise to the full amount, which can be helpful if their income is also rising from year to year.

When to Use a 2-1 Buydown

Home sellers who are having diff🅰iculty selling and need to provide an incent꧅ive to find a buyer may want to consider offering (and paying for) a 2-1 buydown.

Borrowers may benefit from a buydown if it allows them to buy the home they want at a price𒆙 they can affor൲d. However, they will also want to consider what would happen if their income doesn’t rise fast enough to keep up with their future monthly payments.

Buyers should also make sure that they are getting a f⭕air deal on the home in the first place. That’s because some sellers might increase the home’s price to make up for the cost of the 2-1 buydown.

Note that buydowns may not be available under some state and federal mortgage programs or from all lenders. A 2-1 buydown is available on fixed-rate Federal Housing Administration (FHA) loans, but only for new mortgages and not for refinancing. Terms can also vary from lender to lender.

The Bottom Line

A 2-1 buydown lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate for the third year and beyond. A typical 2-1 buydown offers a redu🅺ction of tw☂o percentage points the first year and one percentage point the second year.

Borrowers can pay for a 2-1 buydown, but sellers, including home builders, may also offer one to make a property more attractive. These transactions can be a good deal f🐭or homebuyers if they can afford the higher monthly payments that will begin in year three.