Buydown Loans

A 2-1 Buydown program is a fixed rate loan available in Conventional, FHA, VA and Rural Housing Development programs. This feature “buys” the interest rate down 2% the first year and 1% the second year. It remains fixed for the remaining term of the loan. Applying a 2-1 buydown to $150,000 balance, 30 year term, at 5.75%, would begin at 3.75%, the second year at 4.75% and the final three through thirty years would be 5.75%. To find the cost of the buydown you would need to calculate the amount of the savings each year. Using the same $150,000, 30 year term at 5.75% scenario:

1.    First year rate is 3.75%, payment $694.67
2.    Second year rate is 4.75%, payment $782.47
3.    Third year and final rate is 5.75%, payment $875.36

The first year savings is $180.69 ($875.36-$694.67) per month for 12 months or $2,168.28 ($180.69X12), the second year savings is $92.89 ($875.36-$782.47) per month for 12 months or $1,114.68 ($92.89X12). When we add our savings over the two years we find the total cost of the buydown. $3,282.96 ($2,168.28+$1,114.68)

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