2/1 Buydown Explained

A 2-1 buydown is a mortgage financing arrangement where the interest rate is temporarily reduced for the first two years of the loan. Specifically, the interest rate is reduced by 2% in the first year and by 1% in the second year, before returning to the original note rate for the remainder of the loan term. This arrangement helps borrowers by lowering their monthly payments during the initial years of the mortgage.

Here are some key points about the 2-1 buydown:

1. Interest Rate Reduction:

   • Year 1: The interest rate is reduced by 2%.
   • Year 2: The interest rate is reduced by 1%.
   • Year 3 and beyond: The interest rate returns to the original note rate.

2. Payment Calculation Example:

Year 1:

Year 2:

Year 3 and beyond:

Total Buydown Amount: $7,332

• Loan Amount: $350,000
• Original Interest Rate: 5%
• Principal and Interest (P&I) Payment at 5%: $1,879
• Interest Rate: 3% (5% - 2%)
• P&I Payment: $1,476
• Monthly Difference: $403
• Annual Savings: $4,836
• Interest Rate: 4% (5% - 1%)
• P&I Payment: $1,671
• Monthly Difference: $208
• Annual Savings: $2,496
• Interest Rate: 5%
• P&I Payment: $1,879
• Monthly Difference: $0
• Annual Savings: $0