Basics and Benefits of 2/1 Buydown Program

In today’s mortgage market, one of the most popular loan formats is the FHA loan. Backed by the Federal Housing Administration, these are excellent home loan options for first-time buyers and people in several other situations, offering great rates and limited down payment requirements. 

At Primary Residential Mortgage in Guilford and Brandford, we’re here to tell you about one FHA format that not enough buyers utilize, in our opinion: The 2/1 buydown, one of several loan types we offer. Using the basic 30-year FHA loan as our example here, let’s go over all the basics of the 2/1 buydown, including the costs, benefits, and types of buyers who might be smart to look into this format. 

2/1 Buydown Basics

With the 2/1 buydown, you get a fixed-rate mortgage with FHA backing. Before payments begin, you set specific funds aside in an escrow account that allow you to “purchase” the “down” rate for a two-year period. Here’s how these first two years work:

• Year 1: During the first year of the mortgage, the payment is calculated at 2 percent below what your total 30-year rate will be. So quite simply, if you’re getting a rate of 6 percent for the life of the mortgage, the first year will only be charged at 4 percent. 
• Year 2: In year two, you’ll be charged at 1 percent below the 30-year rate. So in our above example, you’d pay 4 percent in the first year and then 5 percent in the second year. 

From here, your mortgage adjusts back to the exact same format it would have been otherwise for the remainder of the loan term. Essentially, you’ve bought yourself two years of lower payments in exchange for a fee. 

It’s important to note that the buydown program itself is not directly provided by the FHA. They do provide insurance on the loan, like they do with all FHA mortgages, but specific lenders – like ours – are the ones you’ll get this program from. There may also be 1/0 programs available from lenders, following a similar concept but for just one year instead of two. 

Buydown Costs and Coverage

It’s estimated that the rough average cost of the 2/1 buydown is 2.5 percent of the total loan amount. In many cases, though, buyers are able to get the seller to pay for the buydown as part of the selling arrangement. Speak to your advisor to see whether this might be something you can pursue. 

Beneficial Situations

In general, the 2/1 buydown will be great for anyone with limited income for some short period of time, but who expect that income to increase significantly by year three of the loan. Some highly-prepared college students, for instance, might have just enough savings to make lower payments for a couple years before graduating, but then can expect a higher-paying job after this point and can therefore hope to avoid larger payments. There may be several other situations where this format makes sense for you if you expect future income to rise.

For more on the 2/1 buydown loan, or to learn about any of our mortgage loan services, speak to the pros at Primary Residential Mortgage today.