The 2/1 Buydown: In Plain English

Posted on July 28 By Justin McHood

FHA loans are all the rage in today's mortgage marketplace - and with as popular as they are, I am surprised that I don't see more people taking advantage of the FHA 2/1 buydown mortgage.

Heck, the first home I ever bought, I personally used a 2/1 buydown with an FHA 30 year fixed mortgage - so I guess that might even qualify as an "official" endorsement.

2/1 Buydown: How It Works

The way the 2/1 buydown program works is fairly straightforward. You get a 30 year FHA fixed rate mortgage. You set money aside in an escrow account to "buy" the rate "down" for a period of 2 years. The 1st year of the mortgage, your mortgage payment will be calculated at 2% below what your 30 year rate is. The 2nd year of the mortgage, your mortgage payment will be calculated at 1% below what your 30 year rate is. The 3rd - 30th year of your mortgage, your mortgage payment will be calculated at the "normal" rate.

So, for example, let's say that you are going to get a 30 year FHA fixed rate mortgage at 6%. With a 2/1 buydown, you would put money aside for year 1 and 2 to "subsidize" your payment.

  • Year 1 - your monthly payment would be calculated at 4% interest rate.
  • Year 2 - your monthly payment would be calculated at 5% interest rate.
  • Year 3-30 - your monthly payment woudl be calculated at 6% interest rate.
Now - the FHA 2/1 buydown program is not something that you get directly from FHA -- remember, FHA only insures your loan. The FHA 2/1 buydown program is something that you can get from several different FHA lenders.

There are also 1/0 buydown programs from lenders -- which follow the same concept. There is money set aside to "subsidize" your payment for the first year of the loan.

2/1 Buydown: How Much Does It Cost?

How much does a buydown cost? Typically, with most lenders, I see the 2/1 buydown costing 2.5% of the loan amount. The good news is that you can often get the seller agree to pay for the 2/1 buydown! What kind of situation makes the most sense for a 2/1 buydown? Well, in my case - I took advantage of the 2/1 buydown program when I was in college and expected my income to increase over the next 2 years after I graduated, but there are probably a few other situations where the 2/1 buydown program can make sense.

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