Mortgage Blog

What is a 2-1 buydown, and how can they help buyers, sellers, and builders?

October 3, 2022 | Posted by: Jeremy Wilhelm

As the housing market shifts and mortgage rates rise, sellers, home builders, and agents are getting creative in attracting potential buyers. Many are doing this by offering 2-1 buydowns.

A 2-1 buydown is a mortgage that offers a low-interest rate for the first year of the loan, a fairly higher rate for the second year, and the full rate for the third year and beyond. The rate is two percentage points lower during the first year and one percentage point lower in the second.

For example, if interest rates were at 7%, a homebuyer could get a mortgage for 5% interest in the first year, 6% in the second year, and 7% in the years moving forward, or in our minds, look at refinancing between year one and two.

The seller is responsible for the buydown. That concession will be in the form of a lump sum. The lump sum is held in a custodial escrow amount and is applied to the buyer’s payment.

Sellers and builders may want to consider offering a 2-1 buydown if they’re having difficulty selling a home or have a buyer that is on the fence with the current rate environment. A 2-1 buydown is available on fixed-rate Conventional, VA, and FHA loans. Refinancing does not qualify for a 2-1 buydown.

Whether you’re a seller or home builder struggling to sell, or a buyer struggling to buy, we’re here to help. Our team of Omaha mortgage experts would be happy to walk you through 2-1 buydowns in depth. Learn more and contact us at jeremywilhelm.com.

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