What is a 2/1 Buy Down Mortgage 

A 2/1 buy down is an option offered on many types of conventional mortgages. Most borrowers do not understand how they work and how they can benefit them.

A 2/1 buy down means that you actually "buy down" the interest rate for a certain amount of time. It is bought down by paying the actual interest savings up front the buy down actually provides. What are the benefits?

• Lower payments for the first few years
• Seller of property might pay for buy down
• Borrower expects to earn more income in the future
• Helps affordability of a property

A 2/1 buy down on a mortgage with a 6% note rate would have the following "bought down" rates:

Interest rate year 1 = 4%
Interest rate year 2 = 5%
Interest rate year 3 = 6%

If the buy down is used on a 30 year fixed mortgage, you will have 6% for the remaining life of the loan after year 2 of the mortgage term.

Calculating the Cost of a 2/1 Buy Down

The cost of the 2/1 buy down is calculated by taking the difference in payment between the interest rates and adding them up to determine the savings. Savings in our example equals the cost.

Example: 30 year fixed rate mortgage with note rate of 6% and loan amount of $200,000

Monthly Principal and Interest Payments

4% = $954.84
5% = $1073.65
6% = $1199.11

Now, take the savings over 12 months for each interest rate below the note rate:

4% = $954.84/mo. x 12 = $11,458.08/yr
5% = $1073.65/mo. x 12 = $12,883.80/yr
6% = $1199.11/mo. x 12 = $14,389.32/yr

So...

$14,389.32 - $11,458.08 = $2931.24 (Savings of 4% versus 6%)
$14389.32 - $12,883.80 = $1505.52 (Savings of 5% versus 6%)

Now, add the two savings you see above:

$2931.24 + $1505.52 = $3896.76 (This is the savings as well as the COST of a 2/1 buy down in our example).

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