September 23, 2022

What is a 2/1 Buydown? | Lower Your Interest Rate

Interest rate buydown

Have you ever heard the phrase, “date the rate and marry the house”? This popular saying among real estate professionals describes the fluidity of mortgages but the permanence of a home’s purchase price. With a mortgage, you have the option to refinance to a lower interest rate down the road or opt for an adjustable-rate mortgage today. The purchase price, on the other hand, is determined at the beginning of the process and can never be changed. 

While your Realtor can make it easy to say “I do” by negotiating a great purchase contract, interest rates in today’s market don’t exactly seem datable. And that’s where getting pre-approved for interest rate solutions comes into play. In this article, we’re talking about the 2/1 Buydown Program: a way to significantly lower your interest rate between now and when rates improve. 

What is a 2/1 Buydown? 

Simply explained, a 2/1 Buydown allows you to reduce your interest rate for the first two years of your mortgage. The reason it is called “2/1” is that the rate is lowered by 2% in the first year and by 1% in the second. For example, let’s say today’s rate is 6.125%. You would make 12 monthly payments at a rate of 4.125% and then 12 more payments at a rate of 5.125%. 

When the Timing Is Right

So, why would a borrower buy down their interest rate for two years? Because we can reasonably expect that interest rates will be lower two years from now. Interest rates are currently high due to efforts to control inflation. All signs (and predictions from top economists) point toward lowered interest rates in the next 1-2 years. Therefore, you can plan to refinance your mortgage to an interest rate that is lower than today’s once your buydown period is over. 

What’s the Cost? 

The cost of the buydown is simply the difference between the “regular” monthly payment and the reduced one. 

Let’s say you are purchasing a $300,000 home with 20% down and taking out a 30-year fixed-rate mortgage. At a rate of 6.125% (APR 6.395%), the monthly payment would be $1,458. But, with a 2/1 Buydown, the first 12 monthly payments are actually $1,163 and the next 12 monthly payments after that are $1,307. The difference between what you would’ve paid over that 24-month period and what you’re going to pay is $5,359. The cost of the buydown is, therefore, $5,359. 

Using Seller Credits  

If you are wondering why you would opt for a buydown if the cost is equal to what you save, the answer is that you do not pay the cost of the buydown. The seller does, in the form of seller credits. And why would they do that? It was reported in June of 2022 that one-in-seven homes on the market saw a price reduction. That number is expected to continue rising through the rest of the year. So, just as mortgage bankers are offering more interest rate solutions, real estate listing agents are looking for ways to make purchase contracts more attractive. Offering a seller credit that is equivalent to the cost of a buydown is a great incentive to get buyers to the closing table. 

Making Things Easier 

It’s nearly impossible to pinpoint a borrower’s exact “right time to buy.” But with solutions like a 2/1 Buydown, it’s easier to make the decision. If you are currently in the market for a home, get pre-approved for interest rate solutions like this and more. 

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