2 – 1 Buy Down Mortgage Explained

A wooden home with coins next to it, and a downward arrow indicating interest rates are going down

What Is A 2 – 1 Buy Down Loan?

A 2-1 buy down loan, also known as a temporary buy down, is a type of mortgage where the interest rate is temporarily lowered for the first two years of the loan. This can make the monthly payments more affordable for the borrower.

How It Works

For example, let’s say the current interest rate for a 30-year fixed-rate mortgage is 6%. With a 2-1 buy down loan, the interest rate for the first two years of the loan would be 4%, and then it would increase to 5% for the next two years, before finally going back to the original 6% rate for the remaining 26 years. The cost associated with a 2 – 1 buy down loan is covered by the seller as a way to incentivize buyers to purchase their home.

This type of loan can be a great option for first-time homebuyers or those with a limited budget. However, it’s important to keep in mind that the monthly payments will increase after the initial two years, so it’s important to plan accordingly.

Permanent Buy Down

Another option for buyers is permanently buying down an interest rate on a residential mortgage. This can be done by paying points, or a percentage of the loan amount, to the lender at closing. The more points paid, the lower the interest rate.

For example, if a lender is offering a 6% interest rate on a 30-year fixed-rate mortgage, a borrower could choose to pay 1 point (1% of the loan amount) to lower the interest rate to 5%. This may increase the upfront cost, but it will decrease the overall interest paid over the life of the loan.

Increased Affordability

A lower interest rate increases a buyer’s affordability by reducing the monthly mortgage payments. This can make it easier for buyers to qualify for a loan and can also increase the amount of house they can afford to purchase.

It’s important to weigh the pros and cons of both options and consult with a lender before making a decision. A lower interest rate can provide significant savings over the life of a loan, but it’s important to ensure that it fits within your budget and long-term financial goals.

In summary, 2-1 buy down loans and permanently buying down an interest rate on a residential mortgage are two options for buyers looking to make their monthly payments more affordable. A lower interest rate can increase a buyer’s purchasing power and save thousands of dollars over the life of the loan.

If you need a referral to a trustworthy lender, The Svelling Group has a network of lenders to connect you with.