Guest authored by my lender partner extraordinaire: Hunter Lee w/ Onward Mortgage
A 2-1 buydown is an option for buyers to lower their monthly payment in a high interest rate environment. The buydown must be paid by the seller, and results in an interest rate reduction as follows.
- 2 points under the “par” rate for year 1 (i.e. 5% instead of 7%).
- 1 point under the “par” rate for year 2 (i.e. 6% instead of 7%).
- The “par” rate takes over during the 3rd year of the loan term.
Note that regardless of what the mortgage payment is for the first year, the buyer has to qualify based on the par rate.
This is an enticing option for buyers, however, it may be better to keep this money in your pocket by having the seller pay toward closing costs instead. If the loan amount is $400,000, the seller is going to have to give approximately $10,000 for the 2-1 buydown. Everything in the markets is telling us that the interest rates should be dropping within the next 6-12 months, so instead of buying down the rate as we sit now, I would save the $10,000 to do upgrades, repairs, or just help bridge the gap between the payments then refinance once the rates move in a downward direction.
The one situation where a buydown makes sense is if the buyer is anticipating a raise or bonus throughout the next 12-24 months, giving them a little bit of flexibility with the first and second year’s payments with wage increases in their future.
Note that if you do refinance before the 24 month period is up, you will receive the remainder of prepaid interest that has been paid towards the buydown at the closing table for your refinance. If you have any further questions, or would like to speak with someone about your unique situation, please do not hesitate to contact Ellen or myself!
