Jake's Lending Tip of the Week

A 2/1 buydown is a type of mortgage financing that lowers the interest rate on a loan for the first two years of the loan term. The interest rate is typically reduced by 2% in the first year and 1% in the second year. After the two-year period, the interest rate returns to the original note rate. It can be a great option for homebuyers who are struggling with affordability at current market rates. The lower interest rate makes monthly payments more manageable in the short term.

The way it works is that you are prepaying the difference in interest in one upfront payment that is held in an escrow account. The funds in that account are disbursed monthly to cover the difference between the lower payment you are making, and the amount due for the original rate. If you were to sell the home or refinance before the two-year period is complete, the remaining funds are returned to you.

For example:

On a 30yr fixed mortgage of $350k with a note rate of 7%, you would be obligated to make principal and interest payments of $2328.56/month. The cost of a 2/1 buydown would be $8157.78. Utilizing a 2/1 buydown, you would make payments of $1878.88 in the first year, $2089.43 in the second year, and then the full amount in the third year and beyond.

The most effective way to utilize the 2/1 buydown is to negotiate the seller making the payment, essentially subsidizing the lower monthly payment for you. Reach out to determine if a 2/1 buydown is the right strategy for you!