A 2-1 buydown or a 3-1 buydown loan is a type of mortgage loan where the borrower pays a reduced interest rate for the first two years of the loan term. This reduced interest rate is achieved by the borrower paying extra points at the beginning of the loan, which is used to lower the interest rate for the first two years. This can be paid through seller concessions.
The interest rate gradually increases over the next two years, and then remains fixed for the remainder of the loan term. The purpose of the buydown is to make the initial payments more affordable for the borrower, allowing them to qualify for a larger loan amount or to have lower monthly payments during the first two years of the loan term.
The 2-1 or 3-1 buydown loan is typically used by borrowers who expect their income to increase in the near future, or for those who want to maximize their purchasing power during the initial years of the loan. It is important to carefully consider the terms and conditions of the loan before deciding if it is the right choice for your individual financial situation.
Let’s use a 2-1 buydown in this example. The first year of the loan is given a 2% rate reduction and the second year it’s given a 1% reduction.
Let’s say you qualify for a rate of 6% on your home loan. The first year of that loan your rate will be “bought down” by 2% and the second year it will be bought down by 1%. Then back to the 6% for the remaining term of the loan.
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