2/1 Buydown Calculator

By Bill Lyons | Updated on October 7, 2024

A 2/1 buydown mortgage is a type of mortgage that allows the borrower to reduce the amount of interest paid during the first two years of the mortgage. It’s similar to buying points that reduce the interest rates but typically lasts for a period of two years.

You could potentially save a lot on interest and enjoy a lower monthly payment over the life of the mortgage with a 2/1 buydown.

The mortgage gets its name from the fact that the interest rate is 2% lower in the first year, 1% lower in the second year, then goes back to the original interest rate in the third year. It’s classified as a seller’s concession as it’s typically offered by the seller to attract a buyer.

Our 2/1 buydown calculator can help you determine if a temporary buydown mortgage makes sense for your next home purchase.

By inputting information like the type of buydown (3-2-1, 2-1, or 1-0), the length of the mortgage, the total loan amount, and the interest rate, the calculator can estimate your mortgage payment for the first and second years as well as the monthly payment that you’ll pay for the remainder of the mortgage.

Learn more about how this type of loan works, and use our calculator to see if it’s a good alternative for you.

What Is a 2/1 Buydown?

A 2/1 buydown is a type of mortgage buydown that can be used on a DSCR loan, VA loan, or conventional loan. This home financing option is available when a seller or home builder wants to stimulate interest among buyers.

The 2/1 is similar to buying points upfront to reduce the interest rate, but the difference is that the interest rate returns to normal when the third year of the mortgage starts. After the two-year period of lower interest expires, the rate stays the same for the life of the loan unless the borrower refinances.

The seller puts money from the sale of the home into an escrow account to cover the reduced payments for the first two years of the loan until the two-year period of reduced interest expires.

It’s worth noting that the offer has to be extended by the seller, and the borrower can only ask if the seller would consider entering into a 2/1 buydown mortgage. This is due to the fact the seller has to fund the escrow account that pays the lender for the reduced payments.

The mortgage statement shows the full payment, then breaks down how much the borrower and seller have to pay to complete the mortgage payment.

The buyer is presented with a monthly mortgage payment during the loan origination process. On a 2/1 mortgage, the payment doesn’t change per the contract. Instead, the seller agrees to pay the balance of the payment after the interest rate reduction.

For example, a 2% reduction on a $5,000 payment totals $100. The buyer pays $4,900, and the seller covers the remaining $100.

Keep in mind that while the interest rate changes with a 2/1 buydown mortgage, this is not an adjustable-rate mortgage (ARM). Instead, an adjustable-rate mortgage comes with an interest rate that fluctuates based on market conditions throughout the life of the loan, while buydown mortgages come with set interest rate deductions for just a few years before returning to the original interest rate. That said, in some cases, you can buy down your adjustable-rate mortgage.

When looking at adjustable-rate vs. fixed-rate mortgages, a 2/1 can be more advantageous because there’s an upfront discount on interest, and the option to refinance at a lower rate at a later point in time is preserved.

Other Types of Temporary Buydown Mortgages

If you plan to buy a house from a seller offering a buydown concession, you might consider other buydown mortgages. After all, a 2/1 buydown isn’t the only option sellers can offer to make their property more attractive to potential buyers. There are other types of temporary buydown mortgages that can provide similar benefits: the 3/2/1 buydown and the 1/0 buydown.

The 3/2/1 buydown mortgage offers a more gradual transition to the full interest rate over three years:

• Year 1: Interest rate is 3% lower
• Year 2: Interest rate is 2% lower
• Year 3: Interest rate is 1% lower
• Year 4 and beyond: Interest rate returns to the original rate

The 1-year buydown is a simplified form of a buydown mortgage.

• Year 1: Interest rate is 1% lower
• Year 2: Interest rate returns to the original rate

Ask your lender about these other options if you find a seller willing to offer this concession. Each option offers a different balance between initial savings and the duration of the reduced interest rate period. The choice often depends on what the seller is willing to offer.

How Much Does it Cost to Buy Down Your Interest Rate?

Another option for a mortgage buydown is to purchase points when you initiate your mortgage. So, how much does a 2/1 buydown cost? The actual amount you pay depends on the size of your loan, but you can expect to pay an estimated 1% of the loan amount to buy a ~0.25% reduction of your interest rate. With our buydown calculator, you can estimate the cost of buying down a point.

Our buydown calculator uses the home’s purchase price to determine how much it would cost to buy discount points. Each point you buy down equals 1% of the loan amount. So, in theory, it would cost $2,000 to buy one point of interest on a $200,000 mortgage.

How to Calculate a 2/1 Buydown

So, how do you calculate a 2/1 buydown? Calculating a 2/1 buydown is straightforward, especially with our 2/1 buydown calculator. To start the calculation, you’ll need the following information:

• Loan amount
• Buydown interest percentage

The buydown interest percentage is the total of the interest for both years. That is, the buydown is 2% in the first year and 1% in the second year, for a total of 3%.

The formula for calculating buydown points is: buydown points = (loan amount x percentage) / 100.

For example, you’re buying a home for $200,000, and the total buydown is 3%. The formula would look like this:

Buydown points = (200,000 x 3) / 100 = $6,000

In this instance, the seller would need to put $6,000 into an escrow account to cover the reduced payments.

Alternatively, you can use our 2/1 buydown calculator to quickly do the math and get a more accurate idea of the cost of a 2/1 buydown.

How Does the 2/1 Buydown Calculator Work?

The 2/1 buydown calculator uses the written formula and inputs but calculates it more quickly than if you were to do it by hand. The calculator asks for inputs that include:

• Buydown type: Buydown calculators often ask if the buydown type is a 1/0, 2/1 or 3/2/1. You’ll need to select 2/1 to get the correct number if a 3/2/1 buydown isn’t being offered.
• Loan amount: The purchase price of the home minus the down payment.
• Interest rate: The rate that’s being offered in the mortgage.
• Loan term: The length of the mortgage (15 or 30 years on average).

You can get an idea of how much the seller would need to fund for the buydown and use the information as part of your negotiations. The buydown calculator can be more granular in that it includes inputs such as property taxes and insurance to help you better understand the total monthly costs you can expect to pay.

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Is a 2/1 Buydown Mortgage a Good Idea?

A buydown mortgage can be a good idea, but it depends on your unique situation. A 2/1 buydown can be a good idea when:

• Your income is expected to increase: If you anticipate your earnings will grow over the next couple of years, the stepped-up payment structure could align well with your financial trajectory.
• You desire initial financial flexibility: The reduced payments in the first two years can free up funds for other priorities like building an emergency fund, furnishing your new home, or addressing immediate expenses.
• You’re aiming for a higher-priced home: The lower initial payments might help you qualify for a larger loan amount, potentially allowing you to purchase a property that would otherwise be just out of reach.
• You have a solid financial plan: If you’re confident in your ability to manage the increasing payments and have budgeted accordingly, a 2/1 buydown can offer a smoother transition into homeownership.
• You’re planning for upcoming life changes: If you expect positive financial changes in the near future, such as a promotion or a transition from a single to a dual-income household, the buydown structure could bridge the gap until then.

The above pros sound great for anyone buying a home. However, a 2/1 buydown may not be the right choice when:

• You don’t anticipate being able to afford the full payments after the buydown period
• The seller is unwilling to offer this concession
• You’re in a highly competitive market where sellers have multiple offers
• You prefer a consistent payment throughout your loan term
• Your financial situation is likely to become less stable in the near future

Using a 2/1 buydown calculator can help you determine if the 2/1 mortgage makes sense for your budget and the home you have your eye on. As with any mortgage program, whether the advantages and disadvantages outweigh one another will depend on your circumstances.

If you determine that a 2/1 buydown isn’t right for you, there are many other types of mortgage programs– including interest-only loans or bank statement loans–available that may offer distinct advantages for you. Speaking with a loan specialist can help you come to the right decision.

Use Our Free 2/1 Buydown Calculator

At Griffin Funding, we’re here to help you determine whether a 2/1 buydown mortgage is a good idea given your current financial situation and goals. Start with our free buydown calculator, so you can get an idea of how much you’ll save with a 2/1 buydown mortgage. If you’re considering it as a viable option, one of our loan experts can walk you through your mortgage options. Temporary buydowns are a very popular option for home buyers in today’s market as interest rates on conventional loans remain relatively high.

Call us at 858-698-1098 or request a quote online today. We offer a variety of conforming and non-conforming mortgages that are designed for borrowers across the spectrum of financial circumstances. Together, we’ll secure a mortgage that meets your needs and sets you up for success as a new homeowner.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.