A 2-1 buydown is a mortgage loan option in which the seller or builder reduces the homebuyer’s interest rate for the first two years of the loan. In year one, the interest rate is 2% less than the original, locked-in rate. In year two, the interest rate is 1% less.
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
Spire Financial (A Division of V.I.P. Mortgage, Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.
V.I.P. Mortgage, Inc. DBA Spire Financial does Business in Accordance with Federal Fair Lending Laws. NMLS ID 145502. For state specific licensing, visit www.vipmtginc.com/national-licenses/. V.I.P. Mortgage, Inc. is not acting on behalf of or at the direction of the FHA/HUD or the Federal Government. This product or service has not been approved or endorsed by any governmental agency, and this offer is not being made by any agency of the government. V.I.P. Mortgage, Inc. is approved to participate in FHA programs but the products and services performed by V.I.P. Mortgage, Inc. are not coming directly from HUD or FHA. Information, rates, and programs are subject to change without notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions may apply. This is not an offer to enter into an agreement. Not all customers will qualify.