What is the permanent interest rate for a borrower using a FHA 2/1 buydown with a starting rate of 4.5%?

In a FHA 2/1 buydown, the interest rate is effectively reduced for the first two years of a loan. The starting rate, in this case, is 4.5%. Under this structure, the interest rate is reduced by 2% in the first year and by 1% in the second year.

For the first year, the interest rate would be 2.5% (4.5% - 2%). In the second year, the interest rate would increase to 3.5% (4.5% - 1%). After these two initial years, the loan then converts to a permanent interest rate that remains in effect for the remainder of the loan term, which returns to the starting rate of 4.5%.

The question asks for the permanent interest rate, which means we need to identify what the monthly payments are calculated on after the buydown period. Since the buydown affects only the initial two years, the permanent interest rate would not take into consideration the reductions provided by the buydown.

To find the correct answer, you would typically expect that at the completion of the introductory period, the interest rate would revert to a level above the starting rate since it’s a permanent