Mortgages: 2-1 Buydowns

Definition of ‘2-1 Buydown’

A type of mortgage with a set of two initial temporary-start interest rates that increase in stair-step fashion until a permanent interest rate is reached. The initial interest rate reductions are either paid for by the borrower in order to help them qualify for a mortgage, or might be paid for by a builder as incentive to purchase a home.

Sometimes the cost of a buydown is calculated and placed in an escrow account where each month a certain amount is paid out equal to the difference in the temporary mortgage payment and what the eventual mortgage payment will be. Other times the cost of the buydown is treated like a traditional mortgage point. A thorough analysis should be conducted by the borrower to ensure that a buydown is economical in either situation.

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