The housing market is ripe for a type of financing known as “2-1 Buydown.” (Here is a short article that was published on January 6, 2023, where I am quoted.)
Simply put, the buyer reduces their monthly interest rate on their mortgage for the first two years. The first year they pay 2% lower than the note rate (current market rate) and the second year 1% lower than the note rate. In the third year, the borrower adjusts back to paying the market rate.
This product has been in the mortgage world for years, but specific market conditions are required to make it appealing. During my 14 years as a lender, this has been the most ideal time to lean on the 2-1 Buydown Program for Fannie Mae, Freddie Mac, and FHA conforming and high balance loans.
The cost for the buydown is simply the difference in principal and interest payments between the note rate and the buydown rate. These buydown funds are usually paid at closing by the seller. The funds are kept in an escrow account for the borrower, similar to a tax and insurance escrow held on their account. If the seller pays for the buydown, they recoup that amount in their home’s sales price. So, they receive their asking price by adding a couple of steps during the final transaction.
Ideally, the borrower will have the opportunity to refinance into a long-term lower rate fixed option before the third year. Because if the loan is paid off or refinanced early (during the first two years of the loan), the borrower receives a refund of any remaining buydown funds. This is one of the most beneficial aspects!
Why it’s the Right Time for 2-1 Buydowns
- We are experiencing a shift and softening in our real estate market. The volume of inventory is increasing, prices are being reduced, homes are listed for longer, and less buyers are in the market. We are moving in the direction of a buyer’s market.
- As our real estate market turns in favor of buyers, the seller’s incentive to cover the buydown cost is to sell their home at a desired price. Since the seller gives and gets back the buydown fees at the closing table, they mitigate financial impact.
- Conforming rates are at the highest levels in years. This has sparked fear in buyers, as they’ve witnessed a 3% increase in rates since the end of 2021. This 2-1 buydown allows temporary relief in their fixed monthly payments, for the first two years.
- Due to recessionary concerns, we should see a lower rate environment in the next 6-18 months. We have been telling our borrowers that there’s a high likelihood for attractive refinancing options in 2023. Global and local recessions have typically led to lower rate environments for long-term fixed rates.
2-1 Buydown Scenario
Home’s Purchase Price: $750,000
Loan Amount: $600,000
Down Payment (20%): $125,000
MARKET RATE
Loan Amount $600,000
Principal and Interest at 6%* = $3,597/month principal and interest payment
*interest rates are shown for example purposes only – extreme market volatility – rates may vary; must call for an accurate rate
YEAR 1
Loan Amount $600,000
Principal and Interest at 4%* = $2,864/month principal and interest payment
YEAR 2
Loan Amount $600,000
Principal and Interest at 5%* = $3,221/month principal and interest payment
How The Fee or Buydown Cost Works
The total fee works out to $13,308, based on adding:
6% PI ($3,597) – 4% PI ($2,864) = $733 * 12 = $8,796
6% PI ($3,597) – 5% PI ($3,221) = $376 * 12 = $4,512
This fee will be paid by the seller.
If you are looking to buy a home but need to find solutions to lower your monthly payments, this is a program that we should discuss. The market is shifting, but while it’s influenced by high interest rates and high home prices, let’s take advantage of a 2-1 Buydown.
Planet Boulder Loan Consultants are constantly watching factors related to interest rates, home prices, and inventory which influence program offerings. Reach out to ask about what is happening in the local real estate market and what financing options are available.