2-1 Buydowns

Have you spoken to a Realtor or Mortgage lender lately? You may have heard some concerning things like rates over 7%, inventory is up, sellers who don’t have to sell are waiting, and buyers, who were throwing money at sellers 9 months ago, have taken a pause to see how rates and prices play out. Maybe you have even heard about a solution for the outrageous payments that come with high interest rates: the 2-1 Buydown.

2-1 Buydowns are a type of temporary buydown in rate that is paid for by a Seller, Realtor, or Lender. I asked a trusted mortgage partner, Sarah Grebenick at Guaranteed Rate to describe it for us.

“This program allows you to make payments according to an interest rate below today’s rate for up to 2 years. It is a great way to reduce the sting of the payments in today’s current rate market. We ask for a seller concession that would pay the difference in the monthly payment for the reduced rates for the first 2 years of the loan. We place those funds in an escrow account and if you sell or refinance within those 2 years we apply any leftover balance towards the principal as a payment.”

Here is her example:

In this scenario, we would present our offer with a $10,550 seller concession to buy down the rate for the first 24 months of owning the home. The first year’s monthly payment would be $2,450, the second year’s monthly payment would be $2,734, and the remainder of the loan’s monthly payment would be $3,032. Many economics experts are expecting rates to lower again in the next 18 months, giving the buyer time to refinance at a lower rate, locking in a lower payment for the remainder of the time they will own the home.

The obvious upside to this program is that it “buys you time.” You can use this lull in the housing market to negotiate a sweet deal on a house, with little to no competition, and give yourself 2 years to refinance. If rates drop soon, then you have extra money sitting in that escrow account that will be put back into your principle, which means that the seller credit ends up in your pocket!

As with everything in life, there is some risk. If rates do not drop within those 24 months or you are unable to refinance due to employment or other unforeseen circumstances, you could be left with the higher payment for years 3-30 until you can refinance.

This is a brief overview temporary buydown programs, and if you are interested in learning more about a 2-1 Buydown, other temporary buydowns, and if they are right for you, I strongly suggest consulting with a mortgage lender or financial advisor to see how you qualify.