What is a 2-1 buydown mortgage?

A 2-1 buydown mortgage is a type of mortgage where the borrower pays a lower interest rate for the first two years, followed by a slightly higher rate for the remaining loan term. It is a form of temporary interest rate buydown, which is designed to help borrowers qualify for a mortgage by reducing their initial payment burden.

Here's how a 2-1 buydown mortgage works:

1. Lower initial payments: In the first year of the mortgage, the borrower pays an interest rate that is 2% lower than the actual interest rate. In the second year, the rate is 1% lower.

2. Gradual increase: After the initial two years, the interest rate gradually increases at a predetermined rate each year until it reaches the actual interest rate. For example, if the normal interest rate is 4%, it would increase by 0.5% each year until it reaches 4%.

3. Qualification assistance: The lower initial payments help borrowers qualify for the loan as they're based on a lower interest rate. This can be particularly useful for homebuyers who anticipate an increase in their income in the future, allowing them to comfortably make higher payments later on.

4. Savings for the borrower: By paying a lower interest rate in the first two years, borrowers can save money on their monthly mortgage payments. This can provide some financial relief during the initial years of homeownership.

It's important to note that the specific terms and conditions of a 2-1 buydown mortgage may vary depending on the lender and loan program. Therefore, it is advisable for borrowers to fully understand all the terms, including potential future payment increases, before committing to this type of mortgage.