2-1 BUYDOWN
Back to GlossaryDefinition
A temporary mortgage financing arrangement that reduces the interest rate by 2% in year one and 1% in year two before reverting to the note rate.
Summary
A 2-1 buydown is a mortgage financing strategy where the borrower pays an upfront fee to temporarily reduce their interest rate for the first two years of the loan. In year one, the rate is reduced by 2 percentage points below the permanent note rate, and in year two, it's reduced by 1 percentage point. After year two, the rate increases to the full note rate for the remainder of the loan term. This arrangement helps borrowers qualify for larger loans and provides lower initial payments, but requires careful budgeting for the payment increases that will occur.
Usage Context
Essential when studying mortgage financing options, loan qualification strategies, and seller concessions in real estate transactions
Common Confusions
- Thinking the reduced rate lasts for the entire loan term
- Confusing temporary buydowns with permanent rate reductions
- Not understanding that payments will increase significantly after year two
- Assuming the seller always pays for the buydown
- Mixing up the percentage reductions (2% first year, 1% second year)
