Determining the cost of a 2-1 buydown is very straightforward: it's simply the total amount of money you will be saving during the years the buydown is in effect.
For example, let's say you want to purchase a $500,000 home with a 5% down payment ($25,000). You apply for the loan and are approved for a 30-year fixed rate mortgage at 6.5%.
To find out how much a 2-1 buydown would cost in this scenario, you need to find out how much your mortgage payment would be at three different interest rates: 4.5%, 5.5%, and 6.5%.
Once you have the numbers, you just add up the total difference between each of those monthly payments over the first two years. Here's an example of what that could look like for the above scenario:
The total savings realized by a reduced interest rate for the first two years of this loan would be $10,800, so this is how much the 2-1 buydown would cost.
Important note: You can use a mortgage calculator to estimate your monthly payments, but the only way you will know the exact figures is by obtaining a pre-approval from your mortgage advisor. Reach out to Jarae Pearson @ Jarae@HHLNorthwest.com.
What is the Process of Getting a 2-1 Buydown?
Once you know how much the 2-1 buydown will cost for your purchase, you will then ask for that amount as a credit from the home seller or builder.
Depending on what loan program the buyer qualifies for, a seller can offer a certain amount in credits or concessions. This is common in a 'buyer's market' when there are a lot of homes on the market and sellers have to make their properties more attractive by offering some incentives. It can be a bit more difficult to negotiate these credits in a 'seller's market' when there are multiple offers on the home, but it is still possible if the owner is highly motivated to sell.
If the seller agrees to pay for the 2-1 buydown, the amount will be subtracted from their proceeds from the sale of the home at closing. That amount will then go into your escrow account, and a portion of it will go toward lowering your mortgage payment for two years until all the funds are used up.
What Happens When the 2-1 Buydown Period is Over?
After year 2, your interest rate adjusts back to its normal “note” rate. Your rate does not adjust according to market rates at that time; even if rates are higher, you would only pay the rate you initially qualified for.
However, if something happens that causes rates to decrease (like a recession, which we believe will happen sometime next year), you may be able to refinance and get a permanently low rate for the rest of your loan.
How do I find out if this is a good option for me?
If you would like to learn more about the benefits of a 2-1 buydown strategy, or if you would like to see a loan comparison showing all the options available to you, email Jarae to request a mortgage discovery consultation.
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