Over the last couple of years, when interest rates were at historic lows, a typical fixed rate mortgage loan was all people needed. Now, rates have risen. And of course, higher interest rates lead to higher monthly payments. With higher monthly payments, affordability suffers. In other words, someone who could afford a payment on a $200,000 loan at 3%, may not be able to afford the payment on a $200,000 loan at 6.75%.
The good news is that there are programs available that can help. A 2/1 Buydown is one of those programs. What is a 2/1 Buydown? With a 2/1 Buydown, you’ll get a 30 year fixed rate loan with an interest rate that’s discounted 2% during the first year and 1% the second year. So, for example, if your loan officer gets you a loan with a 6.5% on a 30 year fixed rate, a 2/1 Buydown would allow the borrower to make payments based on a 4.5% rate the first year, 5.5% rate the second year, and the full 6.5% the third year and from there on out.
For a 2/1 Buydown, the initial “savings” on the monthly payment for the first 24 months are paid upfront by the seller or builder. (This buydown is NOT an expense the buyer can pay.) As housing prices cool slightly, the smart seller may even offer the buydown concession as an added bonus to attract potential buyers. Another benefit to the seller may be that they can sell for a higher price if they include the Seller Paid Buydown concession.
The buyer benefits are obvious as well. They get a lower rate and payment for 24 months WITHOUT paying the upfront cost of points. The borrower can even offer more for the home (as long as the appraisal supports the value) in order to get the seller concession. Potential homeowners can ease their way into a home with lower payments that simply step up at the end of the first year and second year then remain fixed for the remainder of the loan. Ideally, if rates drop back down within those first two years, the borrower can refinance to a lower fixed rate.
A Seller Paid 2/1 Buydown is just one way that today’s buyers can get the home they want, despite rising rates. If you think this program could be right for you, contact a mortgage professional for more details.
Josh Moody is veteran of the mortgage lending industry. He writes a weekly column for North Jefferson Magazine.
