A 2-1 buydown and a 1-0 buydown are both temporary interest rate buydown programs often used in the mortgage industry to help borrowers afford a mortgage loan by lowering their initial monthly payments. Here's how they work:
With a 2-1 buydown, the interest rate on the mortgage loan is reduced by 2% in the first year, 1% in the second year, and then returns to the original interest rate for the remaining term of the loan. This means that for the first year, the borrower pays a lower interest rate, which gradually increases over the next two years.
With a 1-0 buydown, the interest rate on the mortgage loan is reduced by 1% in the first year and then returns to the original interest rate for the remaining term of the loan. This means that for the first year, the borrower pays a lower interest rate, which then becomes the regular rate for the rest of the loan term.
In both cases, the lower initial interest rate results in lower monthly mortgage payments during the buydown period. Borrowers might choose these buydown options if they expect their income to increase in the future or if they want to allocate more funds to other expenses in the short term.
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