What is 2-1 Buy-Down and How Can it Help You Lower Your Mortgage

When interest rates rise, finding a home you can afford can be challenging. However, you can do a few things to make the process easier. For example, what if there was a way home buyers could lower their mortgage payments for the first years of their ownership? 

I’m talking about a 2-1 buy-down. It’s a tool on the Fannie Mae table that allows buyers to pay a 2% lower fixed rate, generally for the first two years of ownership.

While this homeowner strategy has been around for some time, we’re seeing it reenter the market as an attractive option for buyers and sellers.  

How it Works

To put it in plain terms, a 2-1 buydown is a temporary fixed interest rate mortgage that slowly rises every six months or one year. Essentially, it’s a graduating payment method that allows buyers to pay less upfront. For the first two years, the loan is picked up by a third party, i.e., by the seller, as a concession.

It should be noted that this strategy isn’t a permanent way to get a fixed rate, but it does have some interesting benefits that have become increasingly relevant in our current market. 

Why this is an Attractive Option for Both Buyers and Sellers

While a 2-1 buydown is just a temporary strategy, there are specific people for whom this can work very well. Let’s see how buyers and sellers could potentially find value in this financing option.

Sellers

Why would a seller want to offer this as a concession? The most straightforward reason is that it can reduce the cost of the home and attract buyers to an otherwise slow-moving deal. 

If you’re having difficulty finding someone to buy your home, offering a 2-1 buydown can ensure you move the sale along. It can help ease your buyer into the house and the payment process. 

Buyers

Several types of buyers can easily benefit from getting a temporary fixed rate:

1. Buyers who may only need the home for a short time. If you’re only going to buy a house for a couple of years, why pay the full mortgage rate if other options allow you to pay less upfront? If you know you’ll be moving houses within the next couple of years; a 2-1 buydown might be right for you.

1. Buyers expecting a rise in income in the coming year. Maybe you just got a new job, or you work commission-based. Whether climbing the career ladder or expecting a raise, you can save money on your mortgage until you make the transition. 

1. Buyers who have a low-risk appetite. If you’re banking on the possibility that interest rates will lower, then this would also be an attractive option for you. By the end of the two years, if interest rates lower, you can refinance and come away having saved money. 

Final Thoughts

Ultimately, the 2-1 buydown has been a tool people have used to hedge against current interest rates. Even though it seems to benefit home buyers more than sellers, sellers win by securing a sale in a slow-moving market by lowering the buyer’s costs. 

It’s no wonder we’ve seen this strategy reenter the market recently, with expectations that interest rates will go down in the coming years. Whatever end of the investment spectrum you find yourself on, a 2-1 buydown is a financing option you definitely want to consider.