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Housing Market

Looking for a Lower Interest Rate? | 2/1 Buydown

Secure a lower interest rate with a 2/1 buydown

In every market there’s a solution. Elevated home prices, competitive offer environments, and even high interest rates are no match against the right mortgage program. In this article, we’re focusing on the latter: how to secure a lower interest rate in a less-than-ideal rates market. And this is done with the power of a 2/1 Buydown. In a previous article we explained the basics of the 2/1 Buydown program. Here, we will take a deeper dive into why a buydown means that you can make offers confidently.  

A “Temporarily” Lower Interest Rate is Worth A Lot  

Like all things, mortgage interest rates have their highs and lows. As of the end of 2022, rates are sitting a little higher than most people would like to pay, leading buyers to believe they should put off their home search until they can obtain a lower interest rate. But the thing to keep in mind is that rates are on the high end right now. Drastic measures are being taken by the Fed to control inflation. Naturally, as the Fed comes closer to reaching their inflation rate goals, rates will come back down. Given how aggressive the current effort to control inflation is, economists predict rates will fall as soon as 2023 and continue falling in 2024. 

With the 2/1 Buydown, the buyer pays an interest rate that is reduced by 2% in the first year and reduced by 1% in the second year. This program carries you through the two-year period in which the market will be correcting itself. At the end of the two years, we can very reasonably expect that rates will be lower. At that point (or anytime within the 2 years), you can refinance to a permanently lower interest rate. A 2/1 Buydown serves as both your short-term and long-term plan for homeownership success. 

Let’s Take a Look at the Numbers

So, what does a lower interest rate actually add up to? Let’s take a look at one example. On the purchase of a $500,000 home with 20% down, using a 30-Year Fixed Rate mortgage, assuming an interest rate of 7.00%, the difference between the monthly payment in Year 1 and Years 3-30 is $514. That’s over $6,000 for Year 1. The difference between the monthly payment in Year 2 and Years 3-30 is $263. That’s another $3,000 for Year 2. In conclusion, you would save over $9,000 within the first two years of your mortgage. 

Good for Buyers and Sellers

By mid-2022, the number of sellers offering price reductions doubled and the trend has remained consistent since. But no seller nor listing agent likes a price cut. So, sellers and their agents are looking for alternative ways to make the sale of their home more attractive. Enter, the 2/1 Buydown.

The cost of a 2/1 Buydown is paid by the seller and is typically around 2.25-2.4% of the loan amount. Because sellers are looking for incentives to offer, the buyer could negotiate the cost of the buydown in the form of seller credits. Not only is this an opportunity for the seller to make a deal but the buyer saves thousands of dollars with a lower interest rate. 

The “Right Time” 

Could a lower interest rate be the thing that makes this the “right time” to buy? The 2/1 Buydown is a mortgage solution for a high interest rate environment, and opting for one means you can make a smart homeownership move at any time. Reach out to us for more information or to explore other interest rate solutions