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You CAN buy a house in 2022: 2-1 Buydown

June 28, 2022
Posted in Programs
June 28, 2022 derekevansteam

Rates are out of control these days, and we recognize that. We’re constantly seeking out and adopting new programs and creative financing options for homebuyers that will allow them to keep up with the ever-changing market. But this latest one might be our new favorite. 

It’s called a 2-1 buydown, or temporary buydown. This program slashes your rate and payment for the initial two years of your loan, lessening the burden on your wallet with any extra expenses typically associated with moving into a new place. In this article, we’ll tell you how to take advantage of this revolutionary new program!

How does a 2-1 Buydown work?

With a 2-1 buydown, either 1) the buyer, 2) the seller, and/or 3) both (seller and buyer split the buydown cost) in order to reduce the buyer’s

chart that shows difference in monthly payments with 2-1 buydown

 mortgage rate temporarily, in effect making their monthly payments for the first two years lower than they’ll be in the future.

The “2-1” aspect of the term comes from the fact that the buyer’s mortgage rate will be reduced by 2% during the first year, and then 1% the

 following year, after which it will return to standard pricing for the duration of the loan. Here’s an example of how that might look with a $300,000 loan:

With this 2-1 buydown structure, the buyer is able to save $367 per month in the first year and $189 per month the second year. There is also the option of a 1-0 buydown where the seller buys down the rate for the first year only, which is still a good option and less of a sacrifice on the seller’s behalf. 

2-1 Buydown VS ARM

It’s important to note the difference between a 2-1 buydown and an Adjustable Rate Mortgage (ARM). A 2-1 buydown is a 30-year fixed rate with a subsidy built into the first 2 years. At year 3, the loan moves to its permanent rate for the remainder of the term. An ARM is an Adjustable Rate Mortgage, also amortized over 30 years, but fixed for the initial period (5, 7, or 10 years) and then adjusts annually each year after, based on the market rate. 

ARMs can be riskier too: they can increase up to 1% per year for five years, leaving you with a very high rate. The 2-1 buydown is more predictable and in many ways the safer option. 

What are the benefits of a 2-1 buydown?

Even though the biggest benefit is arguably to the buyer, all parties can benefit in some way from this program. Here are some of the few:

Realtor Benefits

  • Differentiate from other listings. A 2-1 buydown is very attractive to buyers. If you advertise this offering in your listing, it’s sure to turn heads.
  • Offer buydown in place of price reductions on listings remaining on the market longer. Realtors know that every penny in price reductions and second of time on market counts. By offering an incentive by way of a 2-1 buydown, this can eliminate the need to advertise a reduction in price and get the home sold faster.
  • Keep commissions intact. Because you can use the 2-1 buydown as a way to attract buyers in lieu of a sale price decrease, this means you as the agent won’t see a decrease in your commission. 
  • Less impact on appraisal values in neighborhoods. A 2-1 buydown offers the buyer an ease of financial burden without decreasing the sale price of the home, therefore keeping values in the surrounding area intact. 

Seller Benefits

  • Less impact to net proceeds. A smaller concession in the form of a 2-1 buydown can be more impactful than a greater price reduction, and leave sellers with more money in hand. 
  • Increased buyer pool. A 2-1 buydown will increase the attractiveness of your listing, it will also open up the pool to buyers who may be sitting on the sideline.

Buyer Benefits

  • More affordable payment in the first 2 years.
  • Offset expenses associated with new homeownership.
  • Great for buyers who feel like they “missed out” on low rates.
  • Payment increase closely mimics rent increase, great for first time home buyers. .

Lender Benefits

  • Future refinance opportunity. Lenders can assist buyers with a  future refinance after their rates level out.
  • Re-engaging current pre-approved buyers. Buyers that may have been pre-approved but priced out of the market due to the rapid increase in interest rates may now be able to swing it with the money-saving option of a buydown program.

Should I consider a 2-1 buydown?

Are you a good candidate for a 2-1 buydown program? The answer is most likely, yes! However, keep in mind that you will have to qualify based on the amount of the eventual full payment after the discount on the first 2 years. If your debt-to-income ratio is too high, a 2-1 buydown will likely not help you qualify.

Here are some scenarios in which a 2-1 buydown would help:

  • Those who are anticipating an increase in income in the next two years, or who want a home now but want to buy time to get an income increase. 
  • When a major life event has required one spouse to stay home or more funds to be allocated to something such as a move, birth of a child, etc., that’s anticipated to change in the next 1-2 years.
  • Anyone wanting a lower payment in the first couple years of homeownership!

If you or your buyers are interested in learning more about the 2-1 buydown, drop us a line and we’d love to get you more info and see if you’re pre-qualified!