With mortgage rates hitting 6% or more, lenders and sellers are getting creative to keep buyers in the market. One answer is a 2/1 Buydown program allowing borrowers to reduce initial mortgage payments to affordable levels.
HOW DOES A 2/1 RATE BUYDOWN WORK?
Generally speaking, a buydown program is a type of financing offer to reduce your interest rates for the first two years of a mortgage. As a buyer, your interest rate is reduced by 2% the first year and 1% the second year. By the third year, the interest rate goes back to the original interest rate that was locked in when the loan originated.
WHO PAYS FOR THE PROGRAM?
Either a homebuyer or seller can pay for a buydown. Sellers can offer it as a concession to homebuyers. The payment can be made in the form of mortgage points or a lump sum deposited into an escrow account with the lender to subsidize the borrower’s reduced monthly payments.
According to lending experts interviewed by the Washington Post, Fannie Mae, Freddie Mac and the Federal Housing Administration still require the borrower to qualify for their mortgage at the note rate, regardless of the buydown.
PROS & CONS OF A TEMPORARY BUYDOWN
A temporary buydown can benefit both sellers and buyers, but it’s most likely to occur in a buyer’s market where there are many properties available and not enough buyers.
For sellers, it enables them to move properties faster and keeps them from staying on the market too long. For buyers, the reduced monthly payments can help manage initial housing expenses. This can be a strategy to buy when others have backed away due to higher interest rates and inventory is more plentiful with plans to refinance if interest rates go down.
For those buyers planning on refinancing at a later time, using a seller concession to purchase a 2/1 buydown can result in more savings for them rather than using their own funds for a larger down payment.
In terms of cons, a 2-1 buydown does have a high upfront cost, and may only be worth it for the buyer if they can get the buydown via a seller concession. As a seller concession, the buydown becomes part of the closing costs that the seller pays to help the buyer by reducing their closing costs.
A 2-1 buydown can be beneficial for borrowers, but be sure that you educate your clients on the ins and outs before they commit. For more information on the 2/1 Buyout Program or other alternative funding options, talk to a Century 21 Prime South agent to find a program that best meets your needs. 423-821-5551
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