When a borrower has a 2/1 buy down starting at 4.5%, what is the interest rate in the second year?

When a borrower has a 2/1 buy down starting at 4.5%, what is the interest rate in the second year?

• A. 3.5%
• B. 4.5%
• C. 5.5%
• D. 6.5%

Answer: (C)

In a 2/1 buydown mortgage, the interest rate is reduced for the first two years. The loan starts at a lower rate in the first year and then rises in the second year before stabilizing at a higher rate for the remainder of the loan term. In this case, if the original interest rate is set at 4.5%, the first year's rate is reduced by 2%, bringing it down to 2.5%. The second year, the rate increases by 1%, moving it up to 3.5%. After the first two years, the interest rate returns to the original rate of 4.5%. Given that the question asks for the interest rate in the second year, it will be 3.5%, reflecting the 1% increase from the first year's reduced rate. This reasoning clearly indicates that the correct answer aligns with the defined structure of the 2/1 buydown.

In a 2/1 buydown mortgage, the interest rate is reduced for the first two years. The loan starts at a lower rate in the first year and then rises in the second year before stabilizing at a higher rate for the remainder of the loan term.

In this case, if the original interest rate is set at 4.5%, the first year's rate is reduced by 2%, bringing it down to 2.5%. The second year, the rate increases by 1%, moving it up to 3.5%. After the first two years, the interest rate returns to the original rate of 4.5%.

Given that the question asks for the interest rate in the second year, it will be 3.5%, reflecting the 1% increase from the first year's reduced rate. This reasoning clearly indicates that the correct answer aligns with the defined structure of the 2/1 buydown.