Loan officers are noticing an increase in interest from new borrowers in options that can lower their initial mortgage payments as mortgage rates reach 7% and above. These borrowers are hoping that rates will drop significantly enough in the upcoming years so that a refinance will permanently lower their payments.
Temporary rate buydowns and programs to help borrowers with down payments are options. The CEO and founder of Future Mortgage, Blake Bianchi, a loan officer in Boise, told HousingWire reporter Flávia Furlan Nunes that more borrowers are opting for a 2-1 temporary rate buydown.
About 50% of our clients are using this program, according to Bianchi, to make payments that are more affordable. “More customers think they will be able to refinance within those two years,” ”.
Although temporary rate buydowns are not a recent development, many loan officers might not be familiar with the option. They have historically gained popularity during periods when rates have risen.
So what is a 2/1 rate buydown?
A buydown, in general, is a real estate financing strategy that facilitates a borrower’s ability to obtain a mortgage with a lower interest rate. The lower rate may be in effect for the life of the mortgage or for a specific amount of time.
An agreement known as a “2-1 buydown” stipulates that the interest rate will be low for the first year of the loan, slightly higher for the second year, and the full rate for the third and subsequent years. A 2-1 buydown’s interest rate would be 2% less than the note rate for the first year, 1% less than the note rate for the second year, and the note rate for years three through thirty.
How does a 2/1 rate buydown work?
Both the buyer and the seller may contribute to a 2-1 buydown as a seller concession. This payment can be used to supplement the borrower’s lower monthly payments and may be made in the form of mortgage points or a lump sum deposited in an escrow account with the lender.
According to experts interviewed by the Washington Post, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) do require the borrower to qualify for their mortgage at the note rate, regardless of the buydown.
What are the pros and cons?
Sometimes sellers’ concessions like a 2-1 buydown can help them sell their house more quickly and for a higher price.
A 2-1 buydown could have a few advantages for homebuyers. A borrower may have more money available to them during that time than they would if they were making the full mortgage payment because a temporary buydown lowers their mortgage payment for the first two years. They can use that money to furnish or renovate their new home or to save for other financial objectives.
A 2-1 buydown can also make it easier for new homeowners to begin making monthly mortgage payments by setting them up with a lower payment. Additionally, the 2-1 buydown gives a buyer time to increase their earnings before they’re required to pay the full amount if they anticipate their income to increase over the next two years.
Furthermore, using a seller concession to buy a 2-1 buydown instead of using their own money to make a larger down payment or buy points to permanently lower the interest rate can save borrowers more money if they plan to refinance at a lower rate in the future.
A 2-1 buydown has a high upfront cost, so a buyer may only find it worthwhile if they can obtain the buydown through a seller concession. The buydown is a seller concession that the seller makes in exchange for a reduction in the buyer’s closing costs.
After the first and second years of the buydown, the payments will rise before leveling off in the third year and continuing, so the homebuyer will need to get used to the higher payments over time. Another danger is if they depend on their income growing to match those payment increases. And the home buyer is liable for making up any shortfalls if their escrow agent has any issues sending the buydown payment.
Alternatives to a rate buydown
Down payment assistance programs and other types of rate buydown are alternatives to a 2-1 rate buydown. During the first year of homeownership, buyers who opt for a 1-0 buydown pay an interest rate that is 1% lower than the previously agreed-upon rate. In a 3-2-1 buydown, the interest rate is 3% lower the first year, 2% lower the second year, and 1% lower the third year before adjusting to the fixed rate for the remainder of the mortgage term. With a 1-2-1 buydown, their interest rate is 1% lower for the first three years of homeownership.
Borrowers may benefit from a 2-1 buydown, but make sure to inform your clients of all the details before they commit. Read Nunes’ reporting here if you’re curious about the programs that borrowers can utilize to lessen the effects of high mortgage rates.
FAQ
Is a 2-1 Buy buydown a good idea?
A 2-1 buydown could have a few advantages for homebuyers. A borrower may have more money available to them during that time than they would if they were making the full mortgage payment because a temporary buydown lowers their mortgage payment for the first two years.
What is a 2-1 buydown in real estate?
Key Takeaways. With a 2-1 buydown, the interest rate on a mortgage is lowered for the first two years before increasing to the regular, ongoing rate. Typically, the rate declines by two percentage points in the first year and by one point in the second year.
Are mortgage buydowns worth it?
Benefits of lowering your interest rate You will receive a lower rate on your mortgage loan regardless of your credit score, which is the main benefit of lowering interest rates. Lower rates can help you save money on your monthly payments as well as your overall interest costs for the loan’s duration.
How do you calculate a 2-1 buy down?
How does the 2/1 Buydown work? The borrower’s monthly payment is based on an interest rate that is 2% lower than the note rate for the first year of the mortgage. The monthly payment for the second year of the mortgage is determined by an interest rate that is 1% less than the note rate.