What is a 2/1 Buydown Loan?

Doug Smaldino
August 12, 2022
3 min read

I am SUPER excited about this loan program – albeit a dinosaur from Back in the Day!…………………. The program is called, “The 2/1 Buydown Loan”, and it is just what the Doctor ordered for our current real estate and mortgage markets!

This is a great program for you to get into the market NOW! – Check out the video. Please click the link below. Please remember to subscribe to my YouTube Channel!

The “Buydown Loan” is not a new loan – In fact, buy down loans have been around since the 1980s. However, buydown loans have gone dormant and most enders are not currently offering buydown loans. We have over 140 lenders and investors in our database of which only 2 offer buydown loans. Buydown loans are available on Conforming and High-Balance loan limits for Fannie, Freddie, FHA and VA Loans for SFR, Condos & 2-4 units!

All Buydown loans require an agreement with the seller as follows:

Example: Buyer has an accepted offer with a purchase price of $1.0MM with 20% – Loan amount is $800,000. Let’s say the buyer’s interest rate is 5.5%. The “Buydown” – drops the interest rate in the first year by 2%. In the 2nd year, the interest rate would go to 4.5% and in the 3rd year the interest rate would go to 5.5% and it would stay at 5.5% for the remainder of the loan term. The payments made by the buyer in the first 3 years of the mortgage are as follows: 

  1. Year 1 – $3592.36 – (Based on an interest rate of 3.5%)
  2. Year 2 – $4053.49 – (Based on an interest rate of 4.5%)
  3. Year 3 – $4542.32 – (Based on an interest rate of 5.5%)

The Buyer saves $949.96 per month in Year 1, or $11,399.52 for the entire 1st year. In Year 2, the buyer saves $488.83 per month, or $5,865.96 for the year. The total savings to the buyer is $17,265.48 ($11,399.52 + $5,865.96). That is a very nice savings for the buyer during the 1st 2 years of the loan! However, their is a catch – basically someone has to pay for the amount of the “Buydown”.

Buydown Cost must be paid by lender or the seller:

  1. The total cost of the buydown: The cost of the buydown is simply the savings to the borrower which is $17,265.48
  2. A buydown agreement is prepared between the buyer and seller (see attached example). The Buydown funds are held in an account with the lender. Every month the lender will take funds from the Buydown account to make up for the shortage paid by the buyer (i.e. $949.96 during the first 12 months and than $488.83 per month during the 2nd year). If the buyer refinances his loan during the first 2 years of the loan, all unused funds held by the lender are used to reduce the principle balance on the borrower’s loan.
  3. When negotiating with the seller please remember that the borrower cannot pay the buydown fee. The buydown fee must be paid directly from the seller’s proceeds. However, It is acceptable to increase the purchase price by the amount of the buydown fee, and have a corresponding credit paid from the seller for the buydown fee. 

These are wonderful loans and great options for buyers. I believe mortgage rates will be lower in the next 12 – 18 months so regardless of what we do today, the loan will most likely be refinanced. surprised

Please click here to schedule an appointment with me or another team member to go over any questions you may have. Thank you.