2-1 Buydown Loan
Buying a home is a significant investment. Nationwide, the median sale price of a house is above $400,000. Most people cannot afford these high prices out of pocket, so they take out mortgage loans via federal mortgage programs or conventional loans to pay for the purchase price of residential properties.
Even if you can find a reasonable home at an affordable price, the cost of a mortgage loan can be overwhelming. Your primary options include conventional, USDA, FHA, and VA loans.
However, a fourth option can make homeownership more accessible for many borrowers: a 2-1 buydown loan. This type of mortgage allows borrowers to access lower monthly payments in the loan's early years. The loan amount is the same, though.
TrueWay Mortgage is a lending partner that can offer competitive and flexible solutions for this type of loan. Let’s discuss this type of mortgage and how the interest rate terms affect the monthly mortgage payments.
What is a 2-1 Buydown Loan?
The primary feature of a 2-1 buydown loan is that it temporarily reduces the prevailing interest rate on the loan amount for the first two years. If you were to select a fixed-rate loan, you would pay the same interest rate for the entire life of the loan, meaning your mortgage payments would remain the same.
With a 2-1 mortgage, the interest rate is lower for the first two years after you pay an upfront fee, which could be a lump sum deposited into the escrow account or seller credits. After those two years, mortgage rates increase to the number it will stick with for the remainder of the loan term. This makes the mortgage more affordable for the first few years of homeownership.
TrueWay Mortgage specializes in creating customized solutions for borrowers with different needs. Our team has experience offering this type of loan to meet diverse needs, so we can help you understand how a 2-1 buydown loan makes homeownership more accessible.
How Does a 2-1 Buydown Loan Work?
Most 2-1 buydown loans work similarly. Generally, the first year of the loan has an interest rate two percentage points lower than the standard interest rate. The following year, the rate will increase to one percentage point below the standard interest rate. In the third year, the borrower’s interest rate will settle on a final number that will apply to the rest of the loan.
For example, say you want to purchase a home worth $200,000 where the standard interest rate is 5% for a 30-year mortgage. In the first year, the interest rate would start at 3%, meaning your monthly payments could be roughly $843. In the second year, that rate would be 4%, and your mortgage payments would climb to $995. In the third year, the monthly payments would increase to $1,074 and stay there for the rest of your mortgage because of the 5% interest rate.
Sometimes, lenders offer discount points. Discount points can be purchased to lower the interest rate. Essentially, you pre-pay interest payments. You pay a fee upfront to access these. A loan officer from TrueWay Mortgage can simplify this process and help you understand the financial impact of a 2-1 buydown loan on your monthly mortgage payments.
Benefits of a 2-1 Buydown Loan
A 2-1 buydown loan makes sense for certain types of buyers. It offers numerous benefits for the borrower, especially if you can find the right lending partner to tailor the product to your needs. Some primary benefits include low initial interest payments, affordability for first-time buyers, and financial flexibility regarding mortgage costs.
TrueWay Mortgage is committed to helping you access these benefits when buying your next home. We can help you learn about a temporary buydown, mortgage points, and determine the right solution for your financial situation.
Lower Initial Monthly Payments
The upfront costs of buying a home will put a big dent in your bank account. Then, you must start covering your monthly payments right away. This can be challenging, especially for first-time homebuyers.
A 2-1 mortgage buydown loan will reduce your monthly payments for the first couple of years of owning the home. This can help ease the financial burden on borrowers by lowering payments significantly, especially in the first year.
TrueWay Mortgage also offers competitive interest rates so that you can take advantage of an affordable mortgage on top of reduced payments in the first two years.
Easier Transition to Homeownership
Adjusting to the financial commitment of homeownership can be difficult. New monthly expenses include the mortgage, utilities, garbage bills, internet costs, and more. In some cases, buyers may struggle to meet all these obligations early on, especially after spending so much money to acquire the home.
With a lower interest rate in the first two years, the borrower’s reduced monthly payments will be more manageable, making the transition to homeownership easier. TrueWay Mortgage is committed to helping prospective buyers plan for long-term affordability.
Your loan officer will help you understand your finances and create a budget that works for you to comfortably afford a home.
Ideal for First-Time Homebuyers
Becoming a first-time homebuyer comes with many obstacles. Chief among them is the cost of buying and owning a house. Although rent is often comparable to a mortgage in many housing markets, the additional homeownership expenses can make the transition from renting difficult. A 2-1 buydown mortgage is ideal for first-time buyers because it gives them some flexibility in managing their mortgage payments as they settle into their new homes.
The TrueWay Mortgage team understands first-time buyers' unique concerns, especially regarding affordability. We will guide you through the process to ensure that your first years of homeownership are a positive experience.
2-1 Buydown Loan Eligibility
While home prices become less intimidating with a buydown loan, borrowers must still meet eligibility criteria to qualify for this type of mortgage. While the requirements will vary from lender to lender, your mortgage options will depend highly on your credit score, the property type, and the down payment.
Our goal at TrueWay Mortgage is to help you determine your eligibility for mortgage buydown loans early in the process.
Credit Score Requirements
Your credit score reflects your ability to pay back debts. Since a mortgage is a new debt obligation, the mortgage lender must assess your reliability as a borrower. Generally, the minimum credit score for a 2-1 buydown loan is 620. However, lenders can make exceptions for lower scores if you have a larger down payment or a lower debt-to-income ratio.
If you need assistance meeting this criterion, TrueWay Mortgage can help you develop a strategy to improve your score.
Property Eligibility
This home loan can usually only be used to purchase specific properties. For example, you could buy a single-family home or some townhomes. These products can be used on a home purchase that is your second home. They can’t be used for a cash out refinance or investment property.
Many lenders do consider the listing price when determining eligibility. They want to ensure the purchase price doesn’t exceed the home’s value. TrueWay Mortgage offers flexibility and has helped buyers purchase various property types with a 2-1 buydown mortgage.
Down Payment and Closing Costs
The primary expenses are the down payment and closing costs when you first purchase the house. The down payment requirement will vary from lender to lender, but you should expect to pay 10-20% upfront to lower the loan cost.
Closing costs include transfer taxes, title search fees, upfront mortgage insurance, prorated property taxes, attorney fees, agent fees, loan origination fees, escrow account creation, and more.
With a 2 1 buydown mortgage, you can wrap closing costs into the total loan amount. Additionally, you or the home seller will pay the upfront credit to access the lower interest rate and mortgage payments. TrueWay Mortgage has years of expertise managing these details.
Comparing 2-1 Buydown Loans to Other Loan Types
Making an informed decision is essential when buying a home, especially if you want a higher-priced home. You must consider the upfront costs and ongoing expenses to ensure they fit within your budget. With this in mind, let’s compare the unique advantages of a 2-1 buydown loan to other popular loan options.
2-1 Buydown Loans vs. Fixed-Rate Mortgages
Fixed-rate mortgages are incredibly popular in the real estate world. They lock in the same interest rate for the duration of the loan, resulting in consistent payment amounts for the entire ownership period. However, the higher monthly payments will start right away.
With a 2-1 buydown loan, higher costs are delayed for the first two years, with slight increases in the second year and third year of ownership. Generally, a 2-1 buydown is a slightly larger mortgage total, but the early years of the buydown period are more affordable.
2-1 Buydown Loans vs. Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages are slightly riskier because they depend on market conditions. Buyers who move frequently or will only own homes for a few years utilize this type of loan. However, an adjustable-rate loan may come with unpredictable payments depending on the housing market.
A 2-1 buydown loan offers predictable steps in the interest rate, ensuring stability in your budget. For many borrowers, this predictability is far more appealing than the variability of an adjustable-rate loan.
Why Choose TrueWay Mortgage for a 2-1 Buydown Loan?
The right lending partner can make all the difference in your home-buying journey. Our team has been a trusted partner for many clients, helping them buy homes with affordable mortgage products.
TrueWay Mortgage offers expertise in various loan products, ensuring you find a solution that suits your goals. We take a client-focused approach that avoids cramming you into a cookie-cutter process. Instead, we work collaboratively to understand your needs and find a tailored solution.
If the best solution for your purchase is a 2-1 buydown loan, our team will help you understand this type of mortgage's financial details and logistics. Agents can explain what a buydown period is, the importance of the two year period, and everything else about the mortgage term.
We also offer competitive interest rates to make homeownership more affordable in the short and long term.
Who Should Consider a 2-1 Buydown Loan?
2-1 buydown loans are not the best solution for all borrowers. It is beneficial in certain situations, especially for first-time buyers. Knowing that your income will increase as the years go by could be a great way to manage your budget and make the home more affordable early on. A motivated home seller may sometimes be willing to pay the upfront fee necessary to access the lower mortgage rates. If you are buying a home from this type of seller, you could suggest a 2-1 buydown mortgage that they pay for with seller credits.
Start Your 2-1 Buydown Loan Journey Today
2-1 buydown loans could be the perfect solution if you are a first-time buyer or your seller is very motivated. Reducing ongoing expenses in the early years can make the transition to homeownership easier. You will eventually settle into a predictable, locked-in interest rate for the remainder of the loan term after the second year.
TrueWay Mortgage is ready to start the conversation about your financing needs. We will guide you through every step to ensure a smooth and efficient process. Whether you pursue a 2-1 buydown loan or another type of mortgage, our team will work to find a suitable solution.
Call us at 404-962-0032 to schedule a consultation with our expert lending team.