14 Nov Is A 2-1 Mortgage Buydown Right For You?
The term 2-1 buydown is being tossed around more and more in the real estate industry. This strategy was created to help combat high-interest rates, which are strongly prevalent in today’s market.
A 2-1 buydown is a temporary solution to afford a home’s monthly cost with the option to refinance further down the road.
The details surrounding a 2-1 buydown are that the buyer would see a reduced 2% interest rate in the first year, followed by a 1% interest rate in the second year. After the 2 years are completed, the buyer would then be responsible for the total payment rate.
The Process Behind a Mortgage 2-1 buydown
What happens to the amount not paid at the reduced interest rate?
The buydown is funded through the homebuyer or home seller as a seller concession during the closing process. This payment is made in either mortgage points or a lump sum that is ultimately used to subsidize the lower monthly costs for the first 2 years.
Before closing, a real estate agent negotiates this amount during the offer stage. The agreement is noted in the purchase contract, where some sources specify that the buyer will need to be approved for the initial mortgage rate before proceeding into 2-1 buydown options.
Pros and Cons of 2-1 Buydowns
Factors on both sides should be considered before taking on a 2-1 buydown. Evaluating the scenario during and post the 2-year deducted rate is crucial to the success of affording the loan. Here are a few positives and negatives to consider:
More money available
The extra amount that would be going towards the monthly payments gives a buyer time to tackle any renovations or additional move-in costs.
Ease into a monthly payment
The delay in full payment allows the buyer to settle into a new monthly cost. The gradual increase in amount gets the buyer familiar with calculating a new mortgage expense into a monthly budget while saving for other expenses.
High Upfront Cost
The option to pay less for two years sounds great, but it requires a high upfront cost. The best case scenario is if a seller concession is agreed upon by both parties.
Difference between a temporary buydown and buying down the interest rate
Temporary buydown and buying down the interest rate may sound fairly similar, but there lies a key difference between the two. A temporary buydown only grants a lower payment for the first two years before the homeowner needs to pay the full amount. On the other hand, buying down the interest rate lowers the payment for the entirety of the loan.
Other Options
If a 2-1 buydown doesn’t sound right for your buyer’s journey, don’t worry. There are other options available such as down payment assistance programs.
If you’re still hesitant or have questions about the 2-1 buying process and whether it’s an option, reach out to us. We would be happy to help you run numbers for your specific scenario. Call us today. 949-412-2808
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