What is a 2-1 Buydown
December 16, 2022
What is a 2-1 buydown?
A 2-1 buydown means that your mortgage rate is 2 percent lower the first year, 1 percent lower the next and then the stated rate the third year. If your mortgage broker give you a rate of 6.5 percent based on your mortgage application, you would pay only 4.5 percent the first year, 5.5 the second, and then 6.5 the third year and going forward.
How does it work?
There is obviously a cost to getting these lower rates and that cost needs to be paid for by the seller. So as part of negotiations when purchasing a home you would ask the seller to pay for this concession. Let’s say you purchase a home and you would end up with a $350,000 mortgage. To get a 2-1 buydown on the mortgage you would need to get a concession from the seller of $7,968 assuming a stated rate of 6.5 percent.
Here’s the math. The monthly principle and interest payment on a $350,000, 30-year mortgage at 6.5 percent is $2, 212. At 4.5 percent and 5.5 percent it is $1,773 and $1,987 respectively. The savings by doing the 2-1 buydown are $5,268 the first year ($2,212-$1,773=$439 savings per month x 12 = $5,268 for the year), and $2,700 for the second year ($2,212-$1,987=$225 savings per month x 12 = $2,700 for the year). The total savings of the buydown is paid for by the seller and is the amount of the concession ($5,268+$2,700=$7,968).
The seller pays for the concession at closing and the amount of the concession is held in an account by the mortgage company. The mortgage company then takes the difference of the buydown and the stated rate each month from that account. In the case above, during the first year the buyer would pay a monthly P&I payment of $1,773 and the bank would withdraw the remaining due of $439 from the concession account. Should the buyer decide to refinance prior to the buydown program ending, any remaining funds in the concession account is theirs and they could use it to help with the refinancing costs.
Why are we hearing about this mortgage topic all of the sudden?
The current housing market is characterized by lack of buyers and lack of inventory due to rising interest rates. The rising interest rates being the reason for fewer buyers in the market and fewer sellers wanting to become buyers on the other side of their sale. Buyers can take advantage of the 2-1 buydown by both lowering their costs and having time to look for homes they want instead of competing in the multiple offer/no-inspection/quick decision process that characterized the market the last few years. Sellers can offer the buydown as part of marketing their home to attract buyers.
For specific details on 2-1 buydowns or other ways to use seller concessions to get back into the market and realize your dream of home ownership, contact me.
The above example is for illustration purposes. Because all mortgages and mortgage products differ, consult your mortgage professional on the exact cost and terms of your 2-1 buydown so you understand how it will work and know the exact seller concession needed to pay for it.
