What is a 2-1 buydown?

A 2-1 buydown is a type of mortgage loan that involves the lender providing a payment subsidy to the borrower for an initial period of time. The subsidy reduces the borrower's monthly mortgage payments during the first two years of the loan, after which the payments increase by a fixed percentage each year until they reach the full amount of the principal and interest.

In a 2-1 buydown, the borrower pays a lower interest rate during the first two years of the loan, typically 2% lower than the prevailing rate. The lender uses the payment subsidy to make up the difference between the lower interest rate and the full interest rate, resulting in lower monthly mortgage payments for the borrower.

After the initial two years, the interest rate and monthly mortgage payments increase by a fixed percentage each year until they reach the full amount of principal and interest. The increased payments are designed to help the borrower gradually adjust to the full cost of the loan in a way that is more manageable than a sudden jump in monthly payments.

Overall, a 2-1 buydown can be a useful option for borrowers who want to reduce their initial mortgage payments and gradually adjust to the full cost of their loan over time.