How to Take Advantage of a 2-1 Buydown Program in Weatherford
The current housing and mortgage market is forcing consumers to look at alternative financing options; one of the more popular options is known as a “2-1 Buydown.” This is an excellent product for both buyers and sellers. Consumers should not be wary of these products as they have been around for years and are great vehicles to save money on their loan in the first couple of years of ownership.
How does it work? In this case the buyers monthly interest rate is reduced for the first two years. The first year they pay 2% lower than the agreed upon mortgage (current market rate) in the second year the rate is 1% lower than the mortgage rate. In the third year, the rate then matures to the agreed upon mortgage rate at current market pricing.
This is not a new product to the mortgage world, buydown products have been around for years. The popularity of these products requires certain market conditions to be appealing. Unfortunately, due to the current rate environment these products are going to become extremely popular for the remainder 2022 and into 2023.
Some factors that drive the use of the 2-1 buydowns:
The real estate market shifts from sellers to buyer's market. Increased inventory, price reductions, motivated sellers will be more likely to participate as inventory begins to linger on the market.
Par or zero cost mortgage rates rising quickly, rates have more than doubled on 30-year mortgages in 2022. Buydown will offer temporary relief at least for a couple of years.
As a recession is imminent and upon us, buyers will get into the current market and take advantage of refinancing at a lower rate in the next 12-24 months. Recessions have historically seen mortgage rates drop during this time.
Who pays for the buydown? Buydown funds are paid by the seller, builder, and/or realtor(s) or a combination at closing. The funds will be kept in an escrow account for the borrower.
Here is a more detailed scenario and how the buydown works. The cost for the buydown is determined by the difference in principal and interest payments between the note rate and the buydown rate.
2-1 Buydown Scenario
Purchase Price: $500,000
Loan Amount: $400,000
Down Payment (20%): $100,000
MARKET RATE EXAMPLE
Loan Amount $400,000
Principal and Interest at 6.5%* = $2528/month principal/interest payment
YEAR 1
Loan Amount $400,000
Principal and Interest at 4.5%* = $2026/month principal and interest payment
YEAR 2
Loan Amount $400,000
Principal and Interest at 5.5%* = $2,271/month principal and interest payment
How The Fee or Buydown Cost Works
YEAR 1 6.5% PI ($2528) – 4.5% PI ($2,026) = $501 * 12 = $6,018
YEAR 2 6.5% PI ($2528) – 5.5% PI ($2,271) = $257 * 12 = $3,085
The buydown fee is calculated by adding the two years of savings, in this case $9,103. This fee is paid by the seller.
Many analysts and market experts are predicting a better rate environment in 2023 which will give the borrowers the opportunity to refinance at a long-term rate that is more favorable than the current market. Additionally, the borrower will receive a refund if they sell or refinance and there are funds still in the escrow account from the buydown. Contact us today to learn more about this unique product.
*Interest rates are shown for example purposes only, rates may vary; must call for an accurate rate.