how 2 1 buydowns work
a buydown is a real estate financing technique that 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 particular period of time a 2 1 buydown is one kind of temporary buydown in this case lasting for two years in a 2 1 buydown the interest rate will increase from one year to the next until it settles into its permanent rate in year three to make up for the interest that they won t be receiving in those early years lenders will charge an additional fee either a homebuyer or a home seller can pay for a 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 sellers including home builders often use 2 1 buydowns as an incentive for potential purchasers example of a 2 1 buydown mortgagesuppose a real estate developer is offering a 2 1 buydown on its new homes if the prevailing interest rate on 30 year mortgages is 5 a homebuyer could get a mortgage that charged just 3 in the first year then 4 in the second year and 5 after that if the homebuyer took out a 200 000 30 year mortgage for example then their monthly payments during the first year would be 843 in the second year they would pay 995 after the end of the second year their monthly payment would rise to 1 074 where it would stay for the remainder of the mortgage 2 1 buydown pros and consfor home sellers a 2 1 buydown can help them by making it easier and sometimes faster for them to sell their homes for a good price the downside of course is that it comes at a cost which ultimately reduces how much they will net from the sale for homebuyers a 2 1 buydown has several potential benefits for one thing it can help them afford a larger mortgage and a more expensive home than they might otherwise qualify for for another it buys them some time before their mortgage payments rise to the full amount which can be helpful if their income is also rising from year to year the downside for homebuyers is the risk that their income won t keep pace with those increasing mortgage payments in that case they might find themselves stretched too thin and even have to sell the home 