What is a 2-1 Buy Down?

In a challenging real estate market, innovative and motivated sellers look for opportunities to incentivize buyers. When a seller buys down the mortgage interest rate for the buyer for one, two or three years, it makes a huge difference in reducing their monthly payment as they settle into the new home.  

• A 2-1 buy down is a type of financing that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate.

• The rate is typically two percentage points lower during the first year and one percentage point lower in the second year.

• Sellers, including home builders, may offer a 2-1 buy down to make a property more attractive to buyers.

• 2-1 buy downs can be a good deal for homebuyers, provided they will be able to afford the higher monthly payments once those begin.

Pros and Cons
For home sellers, a 2-1 buy down can help them by making it easier, and sometimes faster, for them to sell their homes for a good price. The downside, of course, is that it comes at a cost, which ultimately reduces how much they will net from the sale.

For home buyers, a 2-1 buy down has several potential benefits. For one thing, it can help them afford a larger mortgage and a more expensive home than they might otherwise qualify for. For another, it buys them some time before their mortgage payments rise to the full amount, which can be helpful if their income is also rising from year to year.

*Most mortgage companies will allow refinancing within six months of a loan origination.

Source: https://www.investopedia.com/