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In this blog, we will cover and discuss what is a 2-1 buydown mortgage. In today’s financial climate, it seems like everything is unaffordable. Whether you are living your day-to-day life buying groceries and gasoline or attempting to find housing, everything seems to cost more these days. Clearly inflation is out of control if our senior citizens are seeing the largest increase in Social Security benefits in decades (adjusted annually based on inflation). While the media may try to dodge the record inflation numbers, Americans are feeling it in their pocketbook.

Is a 2-1 Buying Down Mortgage Worth It?

Gustan Cho Associates are experts in the mortgage and real estate markets and are constantly trying to help our clients purchase or refinance a home in the savviest way.

In this blog, we will give a quick overview of the current housing market in the later stages of 2022, a practice that may help the homebuying process become more affordable, and how to apply for a mortgage with our team.

How Does a 2-1 Buydown Mortgage Work?

Market conditions during quarter four, 2022 in the real estate market are not great. According to the National Association of Realtors, existing home sales are down in September 2022. While they may only show a decrease of 1.5%, existing home sales slumped year over year across the nation. What may be more alarming is pending home sales fell for the fourth consecutive month in September 2022 and were down over 10% year over year.

Who Can Benefits From a Temporary 2-1 Buydown Mortgage?

Besides these baseline figures, if you ask real estate professionals, most of them have seen a dramatic decrease in potential new buyers. New construction starts and permits are also down year over year. Most attribute this decline to the sharp increase in interest rates at home affordability compounded by record high inflation making it difficult to save for a down payment and closing costs.

What Is a Temporary 2-1 Buydown Mortgage Loan?

While there are a few markets throughout the nation that are seeing increases, the national trend shows different. We are quickly seeing the real estate market turn to a buyers’ market which could start to lower home values across the nation. The days of rapid appreciation seem to be behind us. Because of this, it can be a great time to purchase a home, if you can afford it. A practice to help enter the housing market.

How Does The Temporary 2-1 Buydown Mortgage Lower Your Rates?

The most common temporary rate buydown in today’s mortgage climate is called a 2-1 buydown. This process can help temporarily lower your mortgage payment for the first few years of your loan. It is no secret that interest rates have skyrocketed over the past year. In fact, we have seen some of the sharpest rate increases in decades under the current administration.

Why Would a Temporary 2-1 Buydown Mortgage Help Homebuyers?

While the goal of these interest rate hikes is to combat record-breaking inflation, it is putting many potential homeowners in a tough spot. Since rates are high, so are monthly mortgage payments. Over the past few years, home values have also skyrocketed, creating a perfect storm of high costs for a home and high monthly interest payments.

These high payments are removing potential homebuyers from qualifying for a home. As investors see this trend, they are now offering a potential solution with a temporary rate buydown. We will now discuss the ins and outs of a 2-1 buydown mortgage rate.

What Are The Basics of The Temporary 2-1 Buydown Mortgage For Homebuyers?

The basics of a 2-1 buydown mortgage are you will lower your interest rate for the first two years of your mortgage loan. The first year of your new mortgage will lower your interest rate by 2%, the following year your interest rate will be lowered by 1%. Example – let’s say the current market will offer you an interest rate of 7.5%. 

How Do You Calculate The Temporary 2-1 Buydown Mortgage?

If you utilize the 2-1 buydown mortgage program, the first year of your new mortgage your payment will be calculated at a rate of 5.5%. The following year your payment will be calculated at an interest rate of 6.5%. After two years, your rate will go back to the original 7.5%.

This will give you temporary interest payment relief to help you ease into homeownership. Unfortunately, nothing in this world is free, so let’s discuss why you are offered a lower interest rate for the first two years of your new mortgage.

The 2-1 Buydown Mortgage Helps Home Sellers With Quicker Sale

As interest rates have dramatically increased, the housing market is quickly turning from a sellers’ market to a buyers’ market. A 2-1 buydown mortgage is offered by the seller to incentivize buyers to purchase their home. A seller will offer a temporary buydown as a closing concession.

This temporary 2-1 buydown mortgage is available on primary and second home purchases only. Once again, it will enable the borrower to have a lower interest rate for the first two years and help ease them into the homeownership process. How does the buydown work?

Who Benefits From the 2-1 Buydown Mortgage?

The easiest way to explain the temporary 2-1 buydown mortgage is the seller will offer concessions to pre-pay the adjusted interest payments in advance. The seller will offer concessions to fund an escrow account with all of the interest the buyer is saving. While writing the contract, the temporary buydown agreement must be in place.

How Much Does The 2-1 Buydown Mortgage Cost?

The prepaid sum of missing interest payments is deposited into an escrow account. Since the lump sum of missing interest is held in a custodial escrow account, every time the buyer makes a mortgage payment, the difference in interest will come out of that escrow account, making the full monthly payment based on the original interest rate. If you are confused, we highly recommend you reach out to our team to discuss the process further. You can reach Mike Gracz on (800) 900-8569 or via email at mike@gustancho.com.

How Does The Rate Buydown Work?

Who funds this custodial escrow account with interest payments? While it is possible for the buyer to fund this account, it does not make financial sense to do so. This situation is the definition of a “six one way half dozen the other” situation. If a buyer funds the temporary buydown, they are effectively paying interest in advance which they could simply pay monthly and break even.

So, there is not a financial incentive to have a buyer fund a temporary 2-1 buydown mortgage account. When a seller offers a temporary buydown as concessions, the benefit is clear as day.

How Much Does The 2-1 Buydown Mortgage Cost The Home Seller?

The seller is essentially paying the interest equal to 2% for the first year and 1% for the second year out of the proceeds of the sale. This will allow the buyer temporary relief on their monthly payments with the hope that interest rates drop over the next few years. Assuming interest rates drop, the buyer then has the ability to refinance into a lower monthly payment and hopefully keep their payment similar to what they paid during the first year, if not lower.

Comparing The Pros and Cons of The 2-1 Buydown Mortgage

Obviously, nobody has a crystal ball and knows where rates will be within the next few years, but more than likely, there will be savings with a refinance in the future. What are the pros and cons of a 2-1 buydown mortgage rate? The main downside to the temporary buydown is the fact that the lower payments are temporary. A buyer utilizing this program must budget accordingly and be prepared for the increase in monthly payment at the one-year and two-year mark.

How Do Borrowers Qualify For The 2-1 Buydown Mortgage?

Just because the payments are lower for the first two years, does not mean you should adjust your budget. Also, a home buyer must qualify based on the higher interest rate. So, a temporary rate buydown does not increase your buying power, it just offers temporary interest payments relief to help ease you into your new mortgage.

The 2-1 Buydown Mortgage Offers Temporary Lower PITI 

And the pros to a temporary buydown are the lower payment and the saved money as a buyer. The pros of a temporary buydown on the selling side simply are to move the home in a faster way. Offering this incentive will increase your chances of selling your home. As we see the market shifting into a buyers’ market, sellers are getting creative to entice the sale of their home.

The Sellers Need To Pay For The 2-1 Buydown Mortgage

Of course, offering this temporary buydown will eat out of their profits when selling the home. For a home around $400,000, a seller will need to offer approximately 2% to 2.5% seller concessions in order to offer this to the one buydown. It is also possible to do a one-year buydown which will dramatically lower the concessions required but also lower the benefit to the potential buyer.

Since the temporary rate buydown is something that has recently resurfaced in the real estate market, many of our professional real estate agents have questions. Most of the time, they ask if it would be more beneficial for the seller to lower the price of the home or for the buyer to buy their interest rate down with discount points for savings. There are some major differences between discount points and a temporary rate buydown.

Discount Points Versus Temporary 2-1 Buydown Mortgage

If you utilize discount points, you are pre-paying interest upfront to receive a lower interest rate for the entirety of the mortgage loan. While that sounds like a great option, in today’s market conditions, it is nearly impossible to buy your rate down 2% or even 1% in rate. The temporary rate buydown will offer more savings in a shorter amount of time compared to utilizing discount points to buy the rate down permanently.

Should Sellers Offer Discount Points or Temporary 2-1 Buydown Mortgage?

Since rates are so high, if you purchase a large amount of discount points, you may be leaving money on the table. If interest rates drop in the next few years, you may not recoup the costs of the discount points from the initial investment. What about lowering the sales price of the home? If you lower the price of a home $10,000, you are only going to see monthly savings of approximately $70-$80 (based on current market rates).

If you utilize the temporary rate buydown, your savings will be considerably higher. When you are able to amortize a mortgage over a 30 year period, $10,000 does not make too large of a monthly difference in your monthly payment. We know this new temporary buydown process may be new to your realtor, so we strongly encourage you to share information with your realtor so we can explain further.

Applying For a Mortgage With a Mortgage Broker Licensed in 48 States

Applying for a home loan with Gustan Cho Associate is incredibly easy. Whether we are attempting to utilize the 2 to 1 buydown or not, the process for applying is the same. First, you will reach out to Mike Gracz on (800) 900-8569. You and Mike will have a detailed phone conversation discussing your mortgage qualifications.

Mortgage Loans For Bad Credit

On this phone call it is important to discuss any issues you may feel arise during the mortgage process. It is incredibly important to ask questions of anything you may think will stand in the way. Honesty is key with your mortgage team. If you have any derogatory items in the past, this is the time to inform your loan officer.

Can I Qualify For a Mortgage With Poor Credit?

Derogatory items may include late payments, non-medical collections, bankruptcies, charge offs, judgments, delinquent federal debt such as tax returns or student loans. The underwriting process with mortgage lending is incredibly detailed. These items can and will arise during the underwriting process which could impact on your qualifications.

Mortgage Loans With Credit Scores Down To 500 FICO

In fact, items such as derogatory student loans could come back to disqualify you during the underwriting process. At that stage, you may have already paid for inspections and appraisals, so that money would be thrown down the drain. Loan officers on Gustan Cho Associates are experts with derogatory credit and will give you the advice you need.

Gustan Cho Associates Has a National Reputation of Being Able To Do Loans Others Cannot Do

If you do not qualify today based on your credit profile. Our team will come up with a financial plan to help you qualify for a loan in the future. We will even follow up with you to make sure you are hitting your milestones. There are very few situations our team has yet to come across, so we will know how to help you and your situation.

We offer all agency mortgage programs without lender overlays to stand in the way. We underwrite directly to Freddie Mac, Fannie Mae, FHA, VA, and USDA guidelines. We do not have any added qualification criteria. After your initial mortgage consultation, you will fill out an online mortgage application sent to you by a licensed loan officer in your state.

Gustan Cho Associates Has The States, Products and Rates

This online application will allow you to enter all your personal information. It will also give our team written consent to verify your credit scores. If there are any issues listed on your credit report, your license loan officer will go over that in detail with you. Assuming everything checks out on your credit, your loan officer will review your income and asset documentation. After that review, you will be issued a pre-approval letter. Congratulations, this will allow you to go out shopping for a home. 

Consult With Mortgage Experts Licensed in 48 States With No Overlays 

As you can tell from this article, our team is constantly looking for programs to help buyers navigate this tricky financial market. The real estate sector has a lot of uncertainty in it as of today. While this is still a great time to purchase a home, we want to make sure you have all the tools at your disposal to save you as much money as possible. For more information on the 2 to 1 buydown process, or any other mortgage question, feel free to call Mike Gracz directly on (800) 900-8569.

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