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Save Hundreds on Your Mortgage Payments With a 2/1 Buydown
Jennifer Hernandez • January 3, 2023
Did you know that there is a strategy that buyers can use to temporarily reduce monthly mortgage payments for the first 2 years of the loan?
This strategy can be especially useful when rates are at a higher than normal level. As the market has seen from the upward swing in rates since that historic day in 2022 where rates practically doubled in a 6 month period, homebuyers more than ever are looking for ways to save money.
The 2/1 Buydown could be just the product you are looking for. We've put together a brief guide that details
everything you need to know. Let's get started.
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So, What Is a 2/1 Buydown?
A 2-1 buydown allows you to temporarily reduce your mortgage interest rate by 2% the first year, and 1% the second year. The third year, the rate will return to its normal status that it was at the time of closing on your mortgage note. This difference in the true rate less the temporary rates for 2 years, is paid by the seller at the time of closing in the form of a closing cost credit. The monies from the seller at the time of closing, will be sent to your lender, and held in and escrow account. Each month, as you are making the 'lesser' payment, the deficit amount is drafted from the escrow account, until depleted in the 24th month.
Should you exit the loan before the 2 years is complete, whatever portion of the unused escrow balance is not used, you are able to apply to the principal balance! This is a benefit of this program. It's useful, let's say, if rates reduce before the 2 years is up, and you decide to refinance your loan.
How Do I Benefit From a 2/1 Buydown?
The biggest benefit of a 2/1 buydown is that it can help you save money on your mortgage payments for the first 2 years. The lower rates for years 1 and 2, mean lower monthly payments, and over time those savings could add up to thousands of dollars.
It's important to understand that while a 2/1 buydown can be beneficial, it may not always be the best option for you. You'll want to weigh all of your options before making a decision, such as how long you plan to stay in the home and whether or not you are able to negotiate this large sum with a potential seller.
Does the Value of My Mortgage Loan Matter?
Yes, the amount of your loan can affect the value of a 2/1 buydown. The cost of the buydown is a sum of the difference in payment from the true rate, and the reduced rates in years 1 and 2.
So, the higher the loan amount, the higher the payment, and therefore the higher the sum of the variables. In general, as a rule of thumb, you can take the loan amount, and multiply by 2.5%. This will give you an approximate amount of what the buydown costs.
For example. A $200,000 loan amount times 2.5% equals $5,000. While a $400,000 loan amount times 2.5% equals $10,000. So as you see, the estimated cost of the buydown, will vary depending on the size of the loan.
Additionally, you'll also want to make sure that you're comfortable with the terms of your loan before committing to a buydown. Be sure to ask questions and read the fine print so that you understand all of your options. Your lender will be able to help you with this.
What Should I Look for in a Loan Provider?
When shopping for a loan provider, it's important to look for one that is reputable and has experience with 2/1 buydowns. A great place to start is by asking friends and coworkers in your local market. There are many benefits to using a local lender.
You'll also want to make sure the lender is willing to work with you to find a rate that works for your budget and timeline. Additionally, be sure to ask about any additional fees or closing costs associated with the loan you're considering.
Make sure to read over all of the loan documents carefully before signing anything. This will help ensure that you understand all of the terms and conditions associated with your loan and can make an informed decision.
Are There Other Types of Buydowns?
Yes, there are other types of buydowns available. The buydown explained above is a temporary buydown. Only buying down your rate for years 1 and 2. There are 1/1 buydowns and 3/2 buydowns available. They work in a similar way to the 2/1 buydown, in that the first year the rate will be 1 or 3 percent lower, respectively. The 3/2 buydown has 3% lower in year 1 and in year 2, has a 2% lower rate. However, this is not a popular option because the enormous amount of cost involved generally exceeds allowable closing costs payable by a seller.
There is also a permanent buydown option. These are closing costs paid at closing, by either the buyer or seller, in order to permanently buy down the interest rate to a certain level.
Discuss these 2 options, the temporary or the permanent buydown with your lender.
Advantage a 2/1 Buydown Have Over Other Buydown Options
A 2/1 buydown can be advantageous for borrowers who plan to stay in their homes for a shorter amount of time. Or additionally, if they plan to refinance in the next 2 to 3 years time. For example, rates historically fluctuate. When they do, many people end up refinancing. If you do refinance, or sell the home within the 2 year period, any unused portion of the money in escrow for the buydown, is credited to your principal balance. This is a very big benefit!
On the contrary, a permanent buydown, is paying money upfront to buydown the mortgage rate. Once paid, this money is non refundable, even if you sell or refinance the loan down the line.
Is the Right Option For Me?
Ultimately, the decision to take advantage of a 2/1 buydown depends on your specific goals and needs. Carefully consider how long you plan to stay in your home, compare rates with and without a buydown, and review all loan documents before signing.
With this information in hand, you'll be able to make an informed choice about the best option for you.
Don't Overlook This Opportunity
Overall, if you're looking for ways to reduce your mortgage payments, then a 2/1 buydown may be a good option for you.
Be sure to talk to your lender about the specifics and understand if this is the right choice for you. Just be sure to take the time to weigh out all of your options. This will help ensure they make the decision that is best for your situation.
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