2-1 Buydown
A 2-1 buydown is a mortgage financing option that temporarily lowers the interest rate for the first two years of a home loan. A seller, builder typically funds this arrangement, or even the lender, as a concession to make a property more financially attractive to a potential buyer.
The structure of a 2-1 buydown is straightforward. In the first year of the mortgage, the borrower’s interest rate is reduced by two percentage points below the note rate. In the second year, one percentage point reduces the rate. By the third year, the interest rate reverts to the original, fixed note rate and remains there for the rest of the loan term. The funds required to cover the interest-rate reduction are pre-paid into a subsidiary account at closing, and are drawn from each month to supplement the buyer’s payment.
The primary purpose of a 2-1 buydown is to ease the initial financial burden of homeownership. For buyers, the key benefit is a lower monthly mortgage payment during the first two years in their new home. This can free up significant cash flow, allowing homeowners to build savings, purchase furniture, or adjust to the new costs of owning a property. It provides a transitional period of payment relief before the standard, permanent payment amount takes effect.
