Learn more about this financial program available to buyers.
One of the biggest hurdles that home owners are facing is the interest rate. I’ve heard statements like:
I want to wait until interest rates come down to put in an offer.
I need rates to be lower.
What if rates drop, and I am stuck with this higher rate?
When will interest rates drop?
All of these are valid questions and statements. Purchasing a home is a big financial commitment and responsibility. While I would never push a client to make a financial decision that the client is uncomfortable with, I do think it is important that buyers know all their options before making a decision. A 2-1 buydown is an option for buyers to utilize that lowers the interest rate on a mortgage for a temporary amount of time. Let’s learn more.
What is a 2-1 buydown?
It’s a program offered through your lender that allows the buyer to lower the interest rate of a fixed rate mortgage for the first two years. In the case of a 2-1, the interest rate is lowered two percent the first year and in the second year, the interest rate is lowered one percent. For the third year, the interest rate returns and remains at the original rate that the buyers secured when receiving the mortgage. For example, let’s say that you get an interest rate of seven percent. In the first year, your rate would be five percent. During the second year of your mortgage, the rate would be six percent, and in the third year it would return to seven percent.
You must qualify for a loan at the highest interest rate to secure a 2-1 buydown.
How much does the 2-1 buydown cost?
There is a cost for buying down the interest rate; in essence you are pre-paying the difference between the lower interest rate and the locked in rate for the first two years. This amount depends on the amount you are borrowing and the current interest rate. Typically, buyers will use closing costs concessions to cover the fee for the buy down. If a buyer has negotiated closing costs concessions with the sellers, the buyers can put the closing costs concessions towards the 2-1 buydown instead of closing costs. Talk with your mortgage lender to get the specifics on your situation.
Can I do a 2-1 buydown on a new construction home?
Yes. Larger builders who also offer financing options will use a 2-1 buydown as an incentive to purchase a home.
Are there any cons of getting a 2-1 buydown?
The biggest con is seeing your mortgage payment rise in year three. Buyers need to be ready for that change and budget accordingly.
What if the interest rate drops lower than my rate?
You can always refinance your loan if the rates drop. If your credit score has improved, then you may be able to get a better interest rate. However, refinancing does come with costs and the specifics of your 2-1 buydown may come into play as well. It’s best to speak with your lender who will be able to give you all the scenarios of monthly payments if you refinance versus not.
2-1 buydowns can be helpful for buyers in specific financial situations. It’s always best to keep an open line of communication with you lender to determine if this option is best for you.
