2-1 Buydown Payment Formula:
with adjusted interest rates for years 1 and 2
From: | To: |
A 2-1 buydown is a mortgage financing technique where the borrower pays a lower interest rate in the first two years of the loan before settling at the final rate. The first year's rate is typically 2% below the final rate, and the second year's rate is 1% below.
The calculator uses the standard mortgage payment formula with adjusted rates:
Where:
Explanation: The calculator applies temporary rate reductions for years 1 and 2 while keeping the loan term constant.
Details: This structure helps borrowers qualify for larger loans (using lower initial payments) and eases the transition into homeownership with gradually increasing payments.
Tips: Enter loan amount in USD, loan term in years, final interest rate, and the temporary rate reductions for years 1 and 2.
Q1: Who typically pays for the buydown?
A: The seller, builder, or lender often pays as an incentive, though sometimes the buyer pays upfront points.
Q2: Are buydown payments tax-deductible?
A: The additional interest paid to fund the buydown may be deductible as mortgage interest if itemizing.
Q3: What happens if I refinance during the buydown period?
A: You may lose the remaining buydown benefits unless the new lender offers comparable terms.
Q4: Can I get a buydown on any loan type?
A: Most common with conventional loans, but some FHA and VA loans offer similar options.
Q5: How does this compare to an ARM?
A: Unlike an ARM, the rate changes are predetermined and only decrease the payment temporarily.