In today’s market, homebuyers are increasingly interested in the affect that rising interest rates are having on their anticipated monthly payment. Many are shocked to find that rising rates have since increased their anticipated monthly payment by several hundred dollars. We don’t want anyone to miss out on purchasing your dream home due to rate concerns, which is why we’re educating buyers on the benefits of a 2-1 Buydown.
What is a 2-1 Buydown?
A 2-1 Buydown (also known as a Temporary Rate Buydown) is a type of financing that allows for a lower payment during the first 2 years of the home loan. This program facilitates a monthly payment that is 2% lower than your locked rate for the first 12 payments. The following 12 payments are then facilitated at a rate that is 1% lower than the originally locked rate. For example, if you lock in a rate at 7%, then your first 12 payments would be calculated on a 5% rate and then the following 12 payments would be calculated on a 6% rate. After 24 months, your payments will revert to match your locked rate of 7%.
This is a great program that helps easy buyers into their monthly payment while also keeping their options open to a refinance opportunity that may arise within their first 2 years of homeownership.
How Does it Work?
The 2-1 Buydown works by having the seller pay the difference in interest payments upfront at closing. This means you will need to find a seller who is willing to provide the concessions necessary for this program. The buydown funds paid for by the seller are then placed into a separate escrow account which is drawn from during each payment. For example, if the first year your monthly savings are $450 per month with this program, then your mortgage servicer would draw this amount from the escrow account before sending your monthly mortgage payment. If you decide to refinance or sell within the 2-year period that the funds have been set aside for, you will receive a credit for the remaining amount in escrow as a principal reduction. The means that you don’t lose the seller concession if you decide to sell or refinance.
Example: on a $300,000 loan amount with a rate of 7%, the monthly payment would be $,1996. After a Temporary Buydown of $6,993, here’s what the payment would look like during the first 2 years.
| Year | Rate | Monthly Payment |
| 1 | 5% | $1,611.00 |
| 2 | 6% | $1,799.00 |
| 3 | 7% | $1,996.00 |
*Sample rate provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Rock Mortgage Services cannot predict where rates will be in the future. Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Rock Mortgage Services LP for current rates and for more information.
In Summary
- A 2-1 Buydown lowers the interest rate of your payment 2 percentage points in the first year and 1 percentage point in the second year.
- This buydown required to participate in the program must be paid for by the seller.
- If the homeowner decides to sell or refinance during their first 2 years of the 2-1 buydown, then the remaining buydown funds will be credited back to them in the form of a principal reduction.
- FHA, VA, and Conventional Purchase only as Primary Residence.
For more information, please don’t hesitate to talk to one of our Licensed Loan Officers. Click here to download the spreadsheet calculator
