A 2/1 buydown loan is a type of mortgage where the interest rate is temporarily reduced during the initial years of the loan. The borrower pays a higher interest rate initially, but it gradually decreases over a specific period, typically in the first two years.
The loan is qualified at the highest interest rate. It starts with an initial interest rate that is typically 2% higher than the rate that would be charged without the buydown. The buydown lasts for the first two years of the loan term, and during this time the borrower pays the reduced interest rate determined by the buydown schedule. After the buydown period ends, the interest rate adjusts to the fully indexed rate. It’s important to note that while the interest rate decreases during the buydown period, the loan amount and repayment terms remain unchanged.
A 2/1 buydown loan can make homeownership more affordable by lowering monthly payments during the buydown period, and helps borrowers plan their budget more effectively, knowing that their mortgage payments will increase over time. However, it is essential to consider the potential drawbacks of this type of loan, such as: higher upfront costs, limited timeframes and possible payment shock once the buydown period ends.
It is crucial to consult with the experts at Sterling Financial to fully understand the terms, costs, and implications of a 2/1 buydown loan. We can provide personalized guidance based on your financial situation and help you determine if this type of mortgage aligns with your long-term goals.