2-1 Buydown

AAA

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.

INVESTOPEDIA EXPLAINS '2-1 Buydown'

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.

RELATED TERMS
  1. Origination Points

    A type of fee borrowers pay to lenders or loan officers in order ...
  2. Buydown

    A mortgage-financing technique with which the buyer attempts ...
  3. 3-2-1 Buydown

    A type of mortgage with a series of three initial temporary-start ...
  4. Negative Points

    A cash rebate paid by lenders to a mortgage broker or the borrower ...
  5. Discount Points

    A type of prepaid interest mortgage borrowers can purchase that ...
  6. Initial Rate Period

    The period of an introductory or "teaser" interest rate on a ...
Related Articles
  1. Credit & Loans

    4 Steps To Attaining A Mortgage

    It starts with knowing your choices as well as your price range. We show you how to get there.
  2. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  3. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  4. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  6. Home & Auto

    Save $30,000 For A Home Down Payment In 5 Months

    Before tackling mortgage rates, home maintenance costs and utilities, every home buyer must first gather the funds for a mortgage loan down payment.
  7. Credit & Loans

    Getting A Mortgage When Building Your Own Home

    It's much harder to get a loan when you're building a home, not moving into one. Here's where to look and what to expect.
  8. Credit & Loans

    Understanding Loan-to-Value Ratio

    Loan-to-value ratio (LVR) is a tool used to evaluate the risk in a collateralized loan, usually a mortgage loan.
  9. Credit & Loans

    Surprising Ways A Mortgage Affects A Credit Score

    It takes a good credit score to get favorable mortgage rates. Then, how you pay a mortgage will shape your score – just having one can lower it at first.
  10. Stock Analysis

    Can American Capital Agency Maintain Its Dividend?

    Dividend investors know that real estate investment trusts with REITs that invest in mortgage-backed securities produce double-digit dividend yields.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center