A Temporary 2-1 buydown is a creative financing option for a FIXED rate mortgage, that lowers the interest rate and payment on a mortgage for the first two years before it rises to the regular, permanent/fixed rate for the remaining term. The rate is typically two percentage points lower during the first year and one percentage point lower in the second year. The cost to buy down the rate is typically funded by the seller, builder, or even the real estate agent. It is provided as a concession, which is then used to subsidize the P&I payment.
Here’s an example. If you’ve locked in a 6.00% interest rate, a Temporary 2-1 Buydown Program would allow you to make monthly payments at a 4.00% interest rate for the entire first year of your mortgage. Then, in year two, your payments would be based on a 5.00% interest rate. Finally, once you hit year three and for the remaining life of your loan, your payments would reflect your originally agreed-upon 6.00% interest rate. You fund the difference in payment by using a concession, typically provided by the seller, to cover the difference in P&I payment from 2% lower rate in year 1 and 1% lower in year 2. After the first 2 years of payment, the subsidy is satisfied and you now make payments on your note rate of 6.00, for the remaining term of the loan.
Who Benefits from a Buydown?
The Homebuyer: They are the ones who benefit from a lower monthly payment for the 1st 2 years of the loan. It helps them ease into their mortgage, especially in a rate environment with rising rates. This lower payment can help with costs associated when buying a new home such as moving expenses, furniture, immediate repairs, etc.
The Seller: Offering a seller credit can attract more buyers. With sale prices on the rise, providing a seller credit to allow for a 2-1 buydown or to assist with closing costs, provides the buyers with a greater incentive to make an offer, that is at or over your list price.
Realtors and Builders: They benefit from negotiating a creative way to assist the buyer with payment and/or closing costs. They will help a seller to get a higher offer yet net the same if they accepted a lower offer without a credit. May result in more and faster sales!
BUYDOWN: Example of how it works!
Property List Price: $410,000
Offer- Full price
$410,000 With a Seller concession of $10,000
For the Buyer
Down payment: $20,500
Loan Amount: $389,500
P&I Payment @ 6.00%: $2,335.25
Total Year 1: $22,314.39
Total Year 2: $25,091.04
Total Year 3: $28,022.99
Total Borrower Payments
Total Year 1-3: $75,428.43—Compared to loan WITHOUT a Buydown Year 1-3: $82,018.44
Savings to the buyer for first 3 years of payments:
$6,590.08 SAVINGS with a 2-1 BUYDOWN- FUNDED BY THE SELLER
Cost to fund the 2-1 buydown
$8,640.55 – $10,000 seller credit = $1359.45 remaining for buyer to use for closing costs
Questions? Give us a call today and we can run through possible scenarios you may be considering!