What Is a 2-1 Buydown Mortgage?
In this blog, we will be covering what is a 2-1 buydown mortgage. As the federal reserve continues to raise interest rates in an effort to slow down inflation, they have had a tremendous impact on the housing market. If you think back just a couple of years ago when the housing market was flourishing, interest rates were at an all-time low, and property values increased exponentially.
The 2-1 buydown mortgage is a program where home sellers can offer buyers by paying down the mortgage rates 2 percent the first year and 1 percent the second year. In the following paragraphs, we will cover the 2-1 buydown mortgage from home sellers.
What Is a 2-1 Buydown Mortgage in Real Estate?
I often laugh and refer to the inflated equity as “monopoly money”. It was a very profitable time for sellers and real estate professionals. Many home buyers took advantage of the low rates to buy homes that otherwise would be hard to qualify for.
With mortgage rates skyrocketing and home prices cooling off, home sellers can offer the 2-1 buydown mortgage to homebuyers to gain the edge over other sellers. The 2-1 buydown mortgage is paid for by the seller. It gives the buyer a reduction of market rates in the first year and a higher rate than the norm in the second year. The rate goes back up to the normal rate in the third and subsequent years. Talk To a Loan Officer about 2-1 buydown mortgage
Mortgage Guidelines on Debt-To-Income Ratios
When applying for a mortgage, there is a figure known as Debt to Income or DTI. The DTI is a percentage based on the mortgage payment and your income that is used to calculate affordability.
Once rates start to go up, the payments on those same houses will be higher and may cause you not to qualify based on your DTI. According to market analysis and talking to real estate agents, home values are gradually decreasing and have been consistent over the last 4-6 months.
Skyrocketing Home Prices
Despite the recent decline, homeowners still have more equity than they did 3 years ago. As I previously mentioned the inflated equity was “monopoly money”, there was no way the market was going to maintain itself. Reality is starting to set in. As a result of the drastic hike in interest rates since the Federal Reserve started back in June of 2022, interest rates are almost 4 points higher.
When Will The Housing Market Crash?
This is forcing buyers to look at homes that are priced lower on the market than they previously would have looked at. As with anything the mortgage industry will go through stages where certain loan programs are more popular than others. Just like other fads, today’s “mortgage fad” is known as a 2/1 buydown mortgage.
How Mortgage Rates Impact How Much House You Qualify For
It is important to understand that when you are applying for a mortgage, the approval will still be based on the current rate. Meaning your DTI will have to support the mortgage payment at a higher rate.
Is There a Housing Recession Coming?
Just like the inflated equity of homes, this continual increase in interest rates cannot go on for the long term. Eventually, they will have to go back down or it will destroy the economy.
Mortgage Rate Forecast
Many financial experts believe that interest rates will start to go down by the second or third quarter of 2023. Nobody has a crystal ball, but I would have to agree that will be the case. So why is the 2-1 buydown mortgage so popular?
Many people feel the same way and are taking advantage of the lower rates until they can refinance their home with a fixed rate at or below the rate of the 2-1 buydown mortgage. Let’s dig a little deeper into how the 2-1 buydown mortgage works. Let me first start by saying “nothing in life is free in the mortgage business”. Click here to apply for 2-1 buydown mortgage
How Do You Explain 2-1 Buydown Mortgage?
The 2-1 buydown mortgage is associated with an upfront cost to pay the interest difference between the rate deductions and the current interest rate. In today’s market, the buydown costs are typically paid for by either the sellers or builders of new homes as an incentive to purchase.
Is It Worth Getting 2-1 Buydown Mortgage For Temporary Lower Rate?
Here is an example of a 2-1 buydown mortgage that I found on www.investopedia.com. Suppose a real estate developer is offering a 2-1 buydown mortgage on its new homes.
If the prevailing interest rate on 30-year mortgages is 5%, a homebuyer could get a mortgage that charged just 3% in the first year, then 4% in the second year, and 5% after that. If the homebuyer took out a $200,000, 30-year mortgage, for example, then their monthly payments during the first year would be $843. In the second year, they would pay $995.
What Happens After Second Year on a 2-1 Buydown Mortgage?
After the end of the second year, their monthly payment would rise to $1,074, which would stay for the remainder of the mortgage.
- $1,074 (original payment) – $843 (payment with 2% rate reduction) = $231 / month
- $1,074 (original payment) – $995 (payment with 1% rate reduction) = $79 / month
- $231/month x 12 = $2,772 + $79/month x 12 =$948
The total upfront cost for the 2-1 buydown mortgage is $3,720
Temporary Lower Rates With 2-1 Mortgage Buydown
There are several things to keep in mind when it comes to the 2-1 buydown mortgage. First and foremost remember that the lower interest rate is temporary, and in year 3 you will be making the higher payment. Some buyers can budget knowing their annual income should increase to help offset the higher monthly payment, but unfortunately, that is not the case for everyone.
Experts Forecast Lower Mortgage Rates
As we previously discussed many are using this as a mortgage product to buy now, at a lower rate with the intent to refinance before year 3. Well, what happens if the rates do not drop by then? The most optimistic way to look at it, is at least you locked a rate in now before they go any higher!
With the current state of the economy, there are certainly no guarantees. In my personal opinion, the 2-1 buydown mortgage is a creative way for people who need to buy a home today to do so cost-effectively. The best advice I could give you is to reach out to your mortgage broker, and let them explain your options and land on whichever one best fits your needs.
Talk To a Loan Officer Click Here
