A 2-1 rate buydown is a seller or builder incentive designed to lower your monthly mortgage payments during the initial years of your loan. It works by pre-paying a portion of your interest, effectively reducing your interest rate for a specified period.
How it Works:
Year 1: Your interest rate is reduced by 2% below the full market rate. For example, if the market rate is 7%, your rate in year 1 would be 5%.
Year 2: Your interest rate is reduced by 1% below the full market rate. Using the same example, your rate in year 2 would be 6%.
Year 3 Onward: Your interest rate reverts to the full market rate (7% in our example) for the remainder of the loan term.
The Buydown Cost:
The cost of a 2-1 rate buydown is the difference between the interest you would have paid at the full market rate and the interest you actually pay during the first two years, plus any lender fees associated with setting up the buydown.
This calculator helps you estimate the total cost of the 2-1 rate buydown. It requires the loan amount, the full initial interest rate, the specific buydown percentages for year 1 and year 2, and the total term of the loan.
Key Components:
Loan Amount: The total amount you are borrowing for the property.
Initial Interest Rate: The actual interest rate of your mortgage without any buydown applied.
Year 1 Rate Buydown: The percentage point reduction applied to the initial rate for the first year.
Year 2 Rate Buydown: The percentage point reduction applied to the initial rate for the second year.
Loan Term (Years): The total duration of your mortgage loan.
By using this calculator, you can better understand the upfront cost associated with a 2-1 rate buydown and how it impacts your early mortgage payments.
function calculateMonthlyPayment(principal, annualRate, years) {
var monthlyRate = annualRate / 100 / 12;
var numberOfMonths = years * 12;
var monthlyPayment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfMonths)) / (Math.pow(1 + monthlyRate, numberOfMonths) – 1);
return isNaN(monthlyPayment) ? 0 : monthlyPayment;
}
function calculateRateBuydown() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var initialRate = parseFloat(document.getElementById("initialRate").value);
var buydownRate1 = parseFloat(document.getElementById("buydownRate1").value);
var buydownRate2 = parseFloat(document.getElementById("buydownRate2").value);
var loanTermYears = parseFloat(document.getElementById("loanTermYears").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(loanAmount) || isNaN(initialRate) || isNaN(buydownRate1) || isNaN(buydownRate2) || isNaN(loanTermYears)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (loanAmount <= 0 || initialRate <= 0 || buydownRate1 < 0 || buydownRate2 < 0 || loanTermYears <= 0) {
resultDiv.innerHTML = "Please enter positive values for loan amount, initial rate, and loan term. Buydown rates cannot be negative.";
return;
}
if (initialRate – buydownRate1 <= 0 || initialRate – buydownRate2 <= 0) {
resultDiv.innerHTML = "Buydown rates cannot be greater than or equal to the initial rate.";
return;
}
var actualRateYear1 = initialRate – buydownRate1;
var actualRateYear2 = initialRate – buydownRate2;
var monthlyPaymentFullRate = calculateMonthlyPayment(loanAmount, initialRate, loanTermYears);
var monthlyPaymentYear1 = calculateMonthlyPayment(loanAmount, actualRateYear1, loanTermYears);
var monthlyPaymentYear2 = calculateMonthlyPayment(loanAmount, actualRateYear2, loanTermYears);
var totalInterestFullRate = (monthlyPaymentFullRate * loanTermYears * 12) – loanAmount;
var totalInterestYear1 = (monthlyPaymentYear1 * 12) – (loanAmount * (1 – Math.pow(1 + (actualRateYear1/100/12), -12)) / (1 – Math.pow(1 + (actualRateYear1/100/12), -12 * loanTermYears))) ; // This is complex for just interest paid in year 1
var totalInterestYear2 = (monthlyPaymentYear2 * 12) – (loanAmount * (1 – Math.pow(1 + (actualRateYear2/100/12), -12)) / (1 – Math.pow(1 + (actualRateYear2/100/12), -12 * loanTermYears))); // This is complex for just interest paid in year 2
// More accurate way to calculate interest paid in specific years
var interestPaidYear1 = 0;
var interestPaidYear2 = 0;
var remainingBalance = loanAmount;
var monthlyRate1 = actualRateYear1 / 100 / 12;
var monthlyRate2 = actualRateYear2 / 100 / 12;
var monthlyRateFull = initialRate / 100 / 12;
var numberOfMonths = loanTermYears * 12;
for (var i = 0; i < numberOfMonths; i++) {
var interestForMonth = remainingBalance * (i < 12 ? monthlyRate1 : (i < 24 ? monthlyRate2 : monthlyRateFull));
var principalForMonth = (i < 12 ? monthlyPaymentYear1 : (i < 24 ? monthlyPaymentYear2 : monthlyPaymentFull)) – interestForMonth;
remainingBalance -= principalForMonth;
if (i < 12) {
interestPaidYear1 += interestForMonth;
} else if (i < 24) {
interestPaidYear2 += interestForMonth;
}
}
var actualInterestPaidFirstTwoYears = interestPaidYear1 + interestPaidYear2;
var interestIfNoBuydownFirstTwoYears = calculateMonthlyPayment(loanAmount, initialRate, loanTermYears) * 24; // Approximation, assumes full rate from start
// Recalculate for accurate first two years interest if no buydown
remainingBalance = loanAmount;
var interestIfNoBuydownFirstTwoYearsAccurate = 0;
for (var i = 0; i < 24; i++) {
var interestForMonth = remainingBalance * monthlyRateFull;
var principalForMonth = monthlyPaymentFullRate – interestForMonth;
remainingBalance -= principalForMonth;
interestIfNoBuydownFirstTwoYearsAccurate += interestForMonth;
}
var buydownCost = interestIfNoBuydownFirstTwoYearsAccurate – actualInterestPaidFirstTwoYears;
resultDiv.innerHTML = "Estimated 2-1 Rate Buydown Cost: $" + buydownCost.toFixed(2);
}