If a borrower has a 2/1 buy down loan, what does the number 2 signify?

If a borrower has a 2/1 buy down loan, what does the number 2 signify?

• A. The interest rate is reduced by 2 percent the first year
• B. The loan amount is reduced by 2 percent
• C. The borrower pays 2 percent more each month
• D. The loan term is shortened by 2 years

Answer: (A)

In a 2/1 buy down loan, the number 2 indicates that the interest rate is reduced by 2 percent during the first year of the loan. This structure is designed to make initial payments more affordable for borrowers, as it temporarily lowers the interest rate. For example, if the normal interest rate on the loan is 5 percent, under a 2/1 buy down, the interest rate would be reduced to 3 percent for the first year. During the second year, the rate typically increases to 4 percent before returning to the original rate in subsequent years. This upfront discount can help borrowers transition into homeownership by easing their financial burden in the initial years of their mortgage. Understanding this structure can be beneficial for borrowers who may expect an increase in their income in the future, allowing them to handle higher payments after the buy down period ends.

In a 2/1 buy down loan, the number 2 indicates that the interest rate is reduced by 2 percent during the first year of the loan. This structure is designed to make initial payments more affordable for borrowers, as it temporarily lowers the interest rate. For example, if the normal interest rate on the loan is 5 percent, under a 2/1 buy down, the interest rate would be reduced to 3 percent for the first year. During the second year, the rate typically increases to 4 percent before returning to the original rate in subsequent years. This upfront discount can help borrowers transition into homeownership by easing their financial burden in the initial years of their mortgage.

Understanding this structure can be beneficial for borrowers who may expect an increase in their income in the future, allowing them to handle higher payments after the buy down period ends.