2-1 Buydown Calculator
Year 1 Payment
Rate: 0%
Year 2 Payment
Rate: 0%
Year 3+ Payment
Rate: 0%
Total Buydown Cost
Required upfront payment
| Year | Interest Rate | Monthly Payment | Monthly Savings | Annual Savings |
|---|
How This Calculation Works
2-1 Buydown Formula: The monthly payment is calculated using the standard mortgage formula: M = P[r(1+r)^n]/[(1+r)^n-1], where M = monthly payment, P = principal loan amount, r = monthly interest rate, and n = total number of payments.
Year 1: Interest rate is reduced by 2% from the base rate, resulting in lower monthly payments.
Year 2: Interest rate is reduced by 1% from the base rate, with payments higher than Year 1 but still below the full rate.
Year 3+: Full base interest rate applies for the remaining loan term.
Buydown Cost: The total upfront cost equals the sum of interest savings for the first two years, which must be paid at closing.
2-1 Buydown Mortgages
A 2-1 buydown is a temporary mortgage financing arrangement that allows homebuyers to secure lower monthly payments during the first two years of their loan. This type of buydown reduces the interest rate by 2% in the first year and 1% in the second year, before returning to the original contracted rate for the remainder of the loan term.
How It Works: The seller, builder, or buyer pays an upfront sum at closing to subsidize the reduced interest payments. This creates immediate payment relief when buyers typically need it most.
The 2-1 buydown structure is particularly beneficial in high interest rate environments, as it provides borrowers with lower initial payments while they adjust to homeownership costs. The upfront cost is calculated based on the difference between the reduced payments and the full-rate payments over the first 24 months.
Common scenarios where 2-1 buydowns are offered include new construction purchases where builders use them as sales incentives, situations where sellers want to make their property more attractive to buyers, and cases where buyers expect their income to increase over the initial years of the mortgage.
How to Use the 2-1 Buydown Calculator
This comprehensive calculator helps you determine the costs and benefits of a 2-1 temporary buydown mortgage. Follow these simple steps to analyze your potential savings and required upfront investment for this financing strategy.
Step 1: Enter Your Loan Details
Input your total loan amount in the first field. This should be your home purchase price minus your down payment. Next, enter the base interest rate that your lender has quoted you before any buydown adjustments. Select your desired loan term from the dropdown menu, with 30 years being the most common option for residential mortgages.
Step 2: Specify Available Buydown Funds
Enter the amount of money available for the buydown purchase in the “Available Buydown Funds” field. This could be seller concessions, builder incentives, or your own funds designated for this purpose. The calculator will show you whether your available funds are sufficient to cover the full buydown cost.
Step 3: Review Your Payment Structure
Examine the calculated monthly payments for each year period. Year 1 shows your payment with a 2% rate reduction, Year 2 displays the payment with a 1% reduction, and Year 3+ shows your payment at the full contracted rate. Compare these amounts to understand your payment progression over time.
Step 4: Analyze the Cost-Benefit Breakdown
Study the detailed breakdown table showing your interest rates, monthly payments, and savings for each period. The total buydown cost represents the upfront amount needed at closing to secure these reduced payments. Use this information to determine if the temporary payment relief justifies the upfront investment based on your financial situation.