Here’s an example. If you’ve locked in a 6% interest rate, Spire’s 2-1 Buydown Program would allow you to make monthly payments at a 4% interest rate for the entire first year of your mortgage. Then, in year two, your payments would be based on a 5% interest rate. Finally, once you hit year three and for the remaining life of your loan, your payments would reflect your originally-agreed-upon 6% interest rate.
Buy Down vs. Buying Down
Buying down the interest rate is different than an interest rate buy down. As mentioned, a buy down is a method to temporarily lower the interest rate. By contrast, buying down the rate means that discount points are paid at closing for a lower interest rate.
How does this work?
The seller or builder covers the difference between what your payment typically would be and the adjusted, bought-down rate. If you are in the process of purchasing a home, you can ask your Real Estate Agent to negotiate a buydown with the seller or builder, if you’re purchasing a new construction.
Who Pays for This?
The most common form of a 2/1 buydown loan is funded by either a builder or seller of the home and is included as an agreement in your purchase contract. This will be negotiated by your real estate agent during the offer process and will paid for at the closing table.
Who can benefit from a temporary buydown?
A common misconception is that this only benefits the buyers, but that is simply not true. During a buyers’ market, or presently, with such a swing in rising interest rates, it is common for properties to sit on the market for a longer period. The longer the property sits on the market, the lower the perceived value of the property becomes. Funding a 2/1 buydown for the borrower can incentivize borrowers to move on a property and prevent the home from taking huge price reductions long term.
This helps the buyer because they can manage their housing expenses slowly and carefully. It also means you can start building equity faster and get into a home before it is too late. In an area of growth, it could help you become a homeowner before getting priced out of the market.
Understanding these different options will help you determine the right loan product for you. Whether you are suitable for a 2/1 buydown will depend on a variety of factors such as your financial situation, the market you are buying a home in, and the Real Estate Agent’s ability to negotiate