In the current interest rate environment, many lenders in the DC, Maryland, and Virginia areas are looking for ways to help make homeownership more affordable. A 2-1 buydown may just be the thing! It is a mortgage lending approach that provides for a lower mortgage payment during the first two years of the loan. In the first year, the principal and interest payment will be based on 2% below the note rate. The principal and interest payment will be based on 1% below the note rate in the second year. For the remainder of the term, the payment will be based on the note rate (the actual interest rate on the loan).
Who pays for a mortgage buydown?
There are several ways to pay for a buydown. The buyer, seller, lender, or builder can fund the buydown. In addition, the buydown cost can be split between different parties in the transaction. The funds are collected at closing, placed in an escrow account, and paid monthly to make the full P&I payment at the note rate.
Mortgage buydowns are not new to the industry. Instead, they tend to resurface from time to time when market factors are just right.
What’s great about a 2-1 buydown mortgage is that homebuyers can purchase a new home at a more affordable payment giving them two years to make lower mortgage payments and ease into the full payment based on the note rate amount. So essentially, homebuyers will get two years of lower payments.
The buydown program can be used for owner-occupied homes and second homes for purchases and rate and term refinance. However, borrowers cannot get cash out by using this program.
2-1 Buydown Mortgage
Offers savings for the first two years. However, pay close attention to the total costs, so you are sure to recognize the benefits, especially if you don’t plan to stay in the home for a long time.
Why are we seeing the 2-1 buydown program now?
In an environment where mortgage rates are rising, the 2-1 buydown benefits homebuyers by helping them afford a larger mortgage and a more expensive home. It is especially appealing to first-time homebuyers who may be having trouble purchasing a home in the current market. In general, the 2/1 buydown will be great for anyone with limited income for a short time but who anticipates their income to increase significantly by year three of the loan. For example, some highly prepared recent college graduates might have just enough savings to make lower payments for a couple of years before landing that higher-paying job. There may be several other situations where this format makes sense for those who expect their future income to rise. However, homebuyers need to be cautious because if their income doesn’t increase as anticipated, they could be stretched too thin financially.
In a buyer’s market, the 2-1 buydown is often used to make it faster and easier for sellers to sell their homes at a reasonable price. The downside is that the funds the seller pays for the buydown come from the net proceeds of the home sale.
If you are interested in purchasing a new home in the DC, Maryland, and Virginia area and like the idea of easing into your mortgage payments, speak with one of our local loan officers today.
