What Is a 2-1 Buydown?

Definition and Examples of a 2-1 Buydown

A 2-1 buydown loan lets you temporarily lower your interest during the first couple of years of homeownership in exchange for an upfront additional charge. During the first year of homeownership, you’ll pay an interest rate that’s 2% lower than your standard rate. In the second year, your interest rate will be 1% lower than the agreed-upon rate. Once the first two years are up, you’ll begin paying the permanent interest rate on your mortgage.

In exchange for a lower rate, the difference is paid through a one-time fee, or point, when you close on your home. This fee is usually deposited in an escrow account, and a small amount is paid out every month to cover the difference. Through this process, you are essentially buying your way into obtaining a lower interest rate for a two-year period. 

• Alternate name: temporary buydown

How a 2-1 Buydown Works

With a 2-1 buydown loan, the borrower pays a lump sum upfront, ensuring a temporarily lower interest rate for the first two years of homeownership.

To help you better understand a 2-1 buydown, let’s look at an example of how one would play out. Let’s say you’re purchasing a $250,000 home with a 5% fixed interest rate. If you agree upon a 2-1 buydown, you’ll pay 3% in interest for the first year of homeownership. During that year, your monthly mortgage payment would be $1,337.34. 

After that year is up, your interest rate will go up to 4% and your monthly payments would go up slightly to $1,476.87. After the two years are up, you’ll begin paying your permanent rate of 5% and your monthly payments will stay at $1,766.17.

This arrangement allows you to save money on your monthly mortgage payments during those two years. During the first year of your 2-1 buydown, you’ll save $428.83 per month and during the second year, you’ll save $289.30 per month. Of course, the difference of $8,617.56 has to be paid upfront and deposited into an escrow account. 

Pros and Cons of a 2-1 Buydown

Pros Explained

• Pay less money upfront on your monthly payments: With a 2-1 buydown, your interest rate is lower for the first two years of homeownership. As a result, your monthly payments will be lower than a traditional payment plan too.
• Eases you into making monthly mortgage payments: Making lower mortgage payments for the first two years can be a good way to ease into homeownership. This way, you’ll become more accustomed to the process and save money, too.
• Saves you money during the first two years of homeownership: Due to the reduced rate, you can save the difference in your mortgage payments. This way, you can save for other short- and long-term financial goals. 

Cons Explained

• Comes with a high upfront cost: A 2-1 buydown is really only worth the price if you can get the seller to pay the escrow deposit. Otherwise, you’ll have to pay a large upfront fee. 
• Potential problems with escrow: If, for any reason, the escrow agent doesn’t send the payment, then the mortgagor (i.e., you) would be responsible for paying the difference.

Alternatives to a 2-1 Buydown

If you’re interested in a buydown program, but you’re not sure if a 2-1 buydown is right for you, here are a few alternatives you can consider.

1-0 Buydown

With a 1-0 buydown, you’ll pay an interest rate that’s 1% lower than the agreed-upon rate during your first year of homeownership. For example, if your regular interest rate is 5%, it’ll be 4% for the first year. You won’t lower your mortgage payments as much as you would with a 2-1 buydown, but you’ll also have to pay less money upfront.

1-1-1 Buydown 

With a 1-1-1- buydown, you’ll pay an interest rate that’s 1% lower for the first three years of homeownership. This can help you ease into your mortgage payments before the interest rate deduction expires.

3-2-1 Buydown

In a 3-2-1 buydown, your interest rate will be 3% lower the first year, 2% lower the second year, and 1% lower the third year before adjusting to your fixed rate. This is a great way to lower your monthly mortgage payments, but the initial escrow payment could be substantial.