2 1 Buydown Calculator

2-1 Buydown Calculator

Use this calculator to understand the potential savings and costs associated with a 2-1 buydown mortgage. A 2-1 buydown temporarily reduces your interest rate for the first two years of your loan, offering a lower payment initially.

Calculation Results

Loan Amount:

Total Buydown Cost:

Year 1 (Rate: ' + year1Rate.toFixed(2) + '%)

Year 2 (Rate: ' + year2Rate.toFixed(2) + '%)

Year 3+ (Permanent Rate: ' + year3PlusRate.toFixed(2) + '%)

Buydown Summary

Total Savings from Buydown (over 2 years):

Net Savings from Buydown:

Net Cost of Buydown:

Breakeven Point:

Breakeven Point:

Understanding the 2-1 Buydown Mortgage

A 2-1 buydown is a type of mortgage financing that allows borrowers to have a reduced interest rate for the first two years of their loan. This can significantly lower your monthly mortgage payments during the initial period, making homeownership more affordable in the short term.

How a 2-1 Buydown Works

With a 2-1 buydown, your interest rate is typically 2% lower than the permanent rate for the first year, and 1% lower for the second year. After the second year, the interest rate reverts to the permanent, agreed-upon rate for the remainder of the loan term. For example, if your permanent interest rate is 7%:

• Year 1: Your interest rate would be 5% (7% – 2%).
• Year 2: Your interest rate would be 6% (7% – 1%).
• Year 3 onwards: Your interest rate would be 7% (the permanent rate).

The "cost" of this buydown, which covers the difference in interest payments for the first two years, is usually paid upfront. This cost can be covered by the home seller, the builder, or even the borrower, and is often expressed in "points" (where one point equals 1% of the loan amount).

Benefits of a 2-1 Buydown

• Lower Initial Payments: The most significant advantage is the reduced monthly payments during the first two years, which can ease the financial burden of moving into a new home, especially with other upfront costs.
• Increased Affordability: Lower initial payments can make a home more affordable, potentially allowing you to qualify for a larger loan or purchase a more desirable property.
• Opportunity for Income Growth: It's often assumed that your income will increase over the first two years, making the higher payments in year three and beyond more manageable.
• Seller/Builder Incentive: Sellers or builders often offer to pay for a 2-1 buydown as an incentive to attract buyers, especially in a slower market.

Considerations and Potential Downsides

• Upfront Cost: Someone has to pay for the buydown. If you, the borrower, are paying for it, you need to weigh the upfront cost against the long-term savings.
• Payment Jump: Be prepared for the payment increase in year three. Ensure your budget can comfortably handle the permanent rate payment.
• Market Conditions: Buydowns are more common in higher interest rate environments or buyer's markets where sellers are looking for ways to make their properties more attractive.
• Refinancing Potential: If interest rates drop significantly within the first two years, you might consider refinancing, which could negate some of the buydown's benefits.

Who is a 2-1 Buydown For?

A 2-1 buydown can be an excellent option for:

• First-time homebuyers: Who need a little extra breathing room financially during their initial years of homeownership.
• Buyers expecting income growth: Those who anticipate a salary increase or career advancement in the near future.
• Buyers in a seller's market: Where sellers are offering incentives to close deals.
• Anyone looking to manage cash flow: If you have other significant expenses planned for the first two years (e.g., home renovations, new baby), a buydown can help.

Use the calculator above to see how a 2-1 buydown could impact your specific mortgage scenario and help you determine if it's the right financial strategy for your home purchase.