What Is a 2-1 Buydown? How It Lowers Your First Two Years of Payments
Higher interest rates have made affordability the biggest hurdle for many buyers. One creative tool can make the first two years of homeownership easier: a 2-1 buydown. Here’s how it works, and why sellers can use it too.
How a 2-1 buydown works
When I made the video above (November 2022), rates were around 7%. With a 2-1 buydown on a 7% loan:
| Loan year | Interest rate |
|---|---|
| Year 1 | 5% (2 points lower) |
| Year 2 | 6% (1 point lower) |
| Years 3 to 30 | 7% (the full note rate) |
You’re paying up front to lower the rate for the first two years, which lowers your payment while you settle into the home.
It’s not an adjustable-rate mortgage
With an ARM, the rate can go up or down with the market after the fixed period. With a 2-1 buydown, the step-up is set in advance: from year three on, you’re locked at the note rate for the rest of the loan. No surprises.
Who pays for it?
The buydown has a cost, and it can be paid by:
- The buyer
- The seller, as a concession
- A combination of both
A loan professional can tell you exactly what it costs on your loan and whether it fits your situation.
Why sellers should know about it
After years of a red-hot seller’s market where sellers made few concessions, the market has moved toward balance. If you’re selling, offering to pay for a 2-1 buydown can make your home affordable to more buyers and help it stand out from the competition, and buyers often value a lower payment more than a small price cut.
Is it right for you?
It’s a tool, not a fit for everyone. If you expect your income to grow, or want breathing room in your first two years, it can help. Just make sure you can comfortably afford the full payment in year three. Today, builders often offer buydowns too, both temporary and permanent; see 5 types of homes that can be risky investments for what to compare.
I’m a real estate agent, not a loan officer, but we can point you to trusted lenders. Reach out, or try our affordability calculator.
