How to Combat High Rates With a 2-1 Temporary Buydown Loan
With increasing mortgage rates, many borrowers are looking for loan options to help combat higher monthly payments. ARM loans and discount points may come to mind- but a 2-1 temporary buydown loan could be a strong alternative.
A 2-1 buydown loan reduces your rate and payment for the first two years of the loan, freeing up funds and making it easier to afford a home.
What is a 2-1 Temporary Buydown Loan?
A 2-1 buydown is a program in which the buyer, seller, and/or builder pays to reduce the buyer’s mortgage rate temporarily.
The interest rate is reduced for the first two years of the loan. The lowered rate helps buyers to ease into their mortgage by reducing their monthly payments temporarily.
The borrower is still required to qualify at the full note rate, despite paying for only a portion of the rate for the first two years.
How Does a 2-1 Buydown Work?
The borrower’s interest rate will be reduced by 2% during the first year and by 1% during the second year. The mortgage carries the full standard rate and payment in years 3-30.
Buydown funds are automatically applied to reduce the monthly payment of principal and interest during the reduced two-year period. Each month’s Buydown Funds have been prepaid by the buyer, seller, or builder, effectively bringing down the payment as if the rate were reduced for the first 24 months of the loan. The rate on the mortgage does not actually change.
Requirements for a 2-1 Buydown Loan
The borrower must qualify at the full note rate despite paying a discounted rate for the first two years.
2-1 buydown loans only apply to 30-year fixed rate mortgages. Credit, income, and further qualifications still apply and will vary by lender.
Buydown funds cannot be used to reduce the mortgage amount for determining the loan-to-value (LTV) ratio.
Temporary Buydown Loans vs. ARM Loans
Adjustable rate mortgages (ARMs) can be a great tool to reduce a borrower’s rate and payment amount. While starting rates are lower than conventional loans, ARM loans interest rates may increase every six months after the initial period.
A 2-1 buydown offers more predictability. It’s a fixed-rate loan, meaning you’ll know what your payment will be during the first year, second year, and years 3-30.
Both loan options offer a path towards affordable homeownership in the beginning. It’s important for borrowers to speak with their trusted loan professional to determine which loan product is best for their unique financial circumstances.
Closing Thoughts
Some additional funds can go a long way toward making a home more affordable, especially when a new homebuyer may need it most.
2-1 buydowns can be a great option for a variety of scenarios, including:
- Those whose income will increase in the next two years
- Those who want a lower initial payment without an adjustable-rate loan
- Those who have a spouse returning to the workforce in the next 1-2 years
- New homebuyers looking for a lower payment in their first years of homeownership
Reach out to your trusted mortgage professional today to discuss which loan products best suit your financial needs.