2/1 Temporary Mortgage Buydown

If you’re in the market for a new home, you may have heard about something called a 2/1 buydown. Though they've been around a while, buydowns seem a tailor-made solution for the current real estate market's biggest problem: Interest rates. But what exactly is a 2/1 buydown, and how can it benefit you as a homebuyer?

A 2/1 buydown is a closing concession available for primary and second home purchases. It enables borrowers to have a temporarily lower interest rate for the first two years of purchase and ease into their full mortgage payment in year three.

The builder or seller will fund a temporary buydown, but it’ll need to be included as an agreement in the purchase contract, and the real estate agent negotiates it during the offer process.

The lump sum is held in a custodial escrow by the buyer’s lender and is applied to the buyer’s payment. The buyer will have a reduced monthly payment, and the difference in interest rates comes out of the escrow account. The first year, the interest rate is lowered by 2 percentage points, and 1 percentage point the following year.

                                                Loan                        Interest Rate           Monthly Payment   Savings (Month/Year)

Market price                           $600,000                      7%                           $3,992                                     $0

Price reduction                        $580,000                     7%                           $3,859                                     $133 x 12 = $1,596

Buydown year one                  $600,000                     5%                           $3,221                                     $771 x 12 = $9,252

Buydown year two                 $600,000                      6%                           $3,597                                     $395 x 12 = $4,740

Total savings                                                                                                                                              $9,252 + $4,740 = $13,992

Note: *Table shows a hypothetical scenario for the 2/1 rate buydown where the mortgage rate is 5% in the first year, 6% in the second, and reverts to 7% after. This scenario doesn’t account for taxes and insurance. Consult a mortgage professional to see what options are available for your situation.

PROS and CONS

The first thing to point out with a temporary buydown is just that—it’s temporary. Initially, it can be a pro that you’re paying lowered mortgage payments for the first two years. However, if your income doesn’t match the payment amount in the third year of the loan, it can become a serious con. That’s why it’s essential to consider the impact of the monthly payments once they resume at the original interest rate from the third year onwards. Buyers must qualify for the initial loan at the permanent rate.

A temporary buydown can benefit both sellers and buyers, but it’s more likely to occur in a buyers' market where there are many properties available but not enough buyers. For buyers, the potential benefits include:

  • A bridge for a market with high rates
  • An opportunity to buy now at lower prices, when interest rates are high, with the ability to refinance later if rates go down.
  • The ability to lock in a lower rate now even if rates don’t go down.
  • Use any remaining balance to help cover refinance costs in the first two years.

For sellers, the potential benefits include:

  • The ability to reduce the home’s days on market.
  • The opportunity to close escrow with more money than with a simple price reduction.

Conclusion

If you're a seller looking to entice a buyer, consider a temporary rate buydown. It may be cheaper than cutting prices. Get advice from your listing agent and run the numbers. Buyers should talk to a mortgage professional about their options. Make sure you weigh all the pros and cons and think about your long-term plans and goals before a decision is made.

 

 

Post a Comment