Loan Officer Practice Exam

In a 2/1 buydown loan, what rate will the payment be based on in month 30 if the start rate is 4.5% and the market rate is 6.5%?

1. 4.50%

2. 5.50%

3. 7.50%

4. 6.50%

The correct answer is: 6.50%

In a 2/1 buydown loan, the structure typically involves reduced interest rates for the initial two years, making it more affordable for borrowers during that time. The start rate for the loan is 4.5%, which reflects the rate the borrower pays during the first year. In the second year, the rate increases by 1% to 5.5%. However, after the initial two-year period of reduced rates, the loan transitions to the market rate, which in this case is 6.5%. By month 30, which falls in the third year of the loan, the loan payment is based on the full market interest rate of 6.5%. This structure allows borrowers to manage initial costs while gradually transitioning to the full loan terms, which is a key feature of a buydown strategy. Understanding this allows loan officers to explain financing options effectively to potential borrowers, highlighting how a 2/1 buydown can make home financing more accessible in the earlier years.