The Power of a 2/1 Buydown
Did you know there is a way to save thousands of dollars during the first two years of your mortgage at no cost to you? Obtaining a 2/1 Buydown is one of the most powerful interest rate hacks on the market. In this article, we’ll explain what a 2/1 Buydown is, provide an example of the savings, and tell you what you need to confidently say, “I’m ready to put in an offer today!”
2/1 Buydown Explained
When interest rates reach peak points, it is reasonable to expect that they will come back down within 2-3 years of those peaks. At the time of writing this, in the Fall of 2023, interest rates hit a period of steady rises all year in an attempt to curb inflation. Now that inflation is close to the target percentage, rates are starting to come back down. Within 1-2 years, they will likely be back to a very financially comfortable level. This cycle is not unusual, in fact, it’s rather predictable.
A 2/1 Buydown is like a bridge that gets you to a point two years from now when interest rates are predicted to be lower. It is an upfront fee, paid by the seller, to lower your interest rate by 2% the first year and by 1% the second year (that’s where the “2”/”1” comes from), saving you potentially hundreds per month. At or before the third year, you can refinance your mortgage to the market’s lower interest rate and keep that rate permanently. The idea is, buy now without ever having to pay today’s rates and subsequently higher monthly payment.
- Lower your interest rate by 2% year 1 and by 1% year 2
- Cost of the buydown is paid by the seller
- When rates fall, refinance to a permanently low rate
- Buy now without ever having to pay today’s rates
2/1 Buydown Example
Here’s an example of how much money a 2/1 buydown would save a borrower in a high interest rate environment. On the purchase of a $400,000 home with 10% down, at an interest rate of 7.875% (8.006% APR), the monthly P&I payment is $2,610. With a 2/1 Buydown…
- Year 1 Monthly P&I Payment: $2,130 | Savings of $481 per month
- Year 2 Monthly P&I Payment: $2,365 | Savings of $245 per month
- Total Savings: $8,712
And remember, it’s not just about saving money in the first two years. The interest rates for years one and two in this example are 5.875% and 6.875%. So, if and when rates drop to the 5%’s or 6%’s, refinance and secure that significantly lower monthly payment permanently.
What to Prepare
The first step to obtaining a 2/1 Buydown is talking to a mortgage banker. They will not only educate you on the program and provide you with quotes but also issue a pre-approval so you’re ready to make offers when the time comes. Secondly, your mortgage banker and real estate agent will connect on the plan because your real estate agent is going to be the one who proposes the buydown to the seller.
Why would a seller cover the cost of your lowered interest rate? Sellers often allocate for negotiations or incentives that will make the selling process easier on their end. Real estate agents often negotiate things like a lower price or credits to cover the cost of repairs. But instead of either of those things, your real estate agent can negotiate the cost of the 2/1 Buydown. This is an easy incentive for the seller to offer and a much more financially powerful tool than something like a price reduction.
- Talk to a mortgage banker to learn more/get quotes
- Get pre-approved so you’re ready to shop
- Sync up with your real estate agent on the plan to negotiate a buydown
If you’re ready to take that first step, reach out!