What is a 2-1 buydown?
A 2-1 buydown can be summed up as reduction in the mortgage interest rate of 2% the first year of the loan, 1% the second year, and then the full rate for the remainder of the term (years 3-30). Today, we’ll learn why you might consider going for a 2-1 buydown when you’re buying a home in Florida, and how it can benefit you.
If you refinance or pay off the loan before the third year, you get a prorated refund, thus lowering the principal balance on the pay off of the loan.
Key points:
A 2-1 buydown lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate.
The rate is two percentage points lower during the first year and one percentage point lower in the second year.
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Sellers may offer a 2-1 buydown to make a property more attractive to buyers. It is a cost that must be paid by the seller (we do have a lender working on a 3-2-1 buydown that can be lender paid, but that is to be saved for another article).
2-1 buydowns can be a very good deal for home buyers, and it’s important that they will be able to afford the higher monthly payments once those begin. However, refinancing later can be an option. (Talk with me today and we can discuss that!)
Speaking of refinancing, if you were to pay off or refi prior to the third year, then you would get a pro-rated refund for the cost of the 2/1 buydown. This is a win-win for the buyer!
More details on how the buydown works
A buydown essentially 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 front to the lender) or for a certain period of time.
From the lender’s viewpoint: To make up for the interest that they won’t be receiving in those early years, the lender will usually charge an additional fee.
You may be asking, who pays for the buydown? How can people make it work?
A home seller pays for the buydown. That payment may be in the form of mortgage points or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments. Talk to me today, and I can go more in depth on how that works.
A 2-1 buydown is only one kind of temporary buydown; there also exists a 3-1 buydown, or a regular temporary buydown. A regular buydown enables the lender to qualify a buyer with the buydown rate. The 2/1 on the other hand is qualified off of the rate used years 3-30 (highest rate).
You may be asking, who pays for the buydown? How can people make it work?
The seller pays for the buydown. Talk to me today, and I can go more in depth on how that works.
For more information on how you can reap the benefits of a 2-1 buydown, call me today at 321-972-6468 or send me an email at kiel.ecimovic@edgehomefinance.com.