Friday, August 26, 2022 / by Kelly Cash
Rate Buy Down | 2/1 Buy Down | What is it and How Does it Work?
With this changing market and increased interest rates, many buyers are taking advantage of a rate buy down. Better yet, with the increase of inventory, some sellers are even covering the cost when negotiating! Ultimately a buy down is simply where you pay a fee in order to get a lower interest rate, thus making your monthly payments cheaper.
This has been a common trend as this is saving buyers more per month in comparison to a price reduction. The reason price reductions have had little effect on affordability is a $10,000 price reduction only saves a buyer around $53 on their mortgage payment at 5.8%. Therefore, sellers are getting creative with being able to offer a credit in lieu of a price reduction, where the lender can utilize those funds to buy down the rate, either permanently or temporarily depending on the plan. This tends to knock off HUNDREDS on the buyer's monthly payment, thus being mutually beneficial to both parties.
Now the 2/1 buy-down is a specific type of rate buy down that can give you another option! It certainly is a tool that has been collecting dust, unneeded, for well over a decade. In a 2-1 buydown, the rate is typically two percentage points lower during the first year and one percentage point lower in the second year. Then the interest will settle into its permanent rate in year three for the life of the loan.
This has been a great strategy for those looking to save a bulk of interest in the first two years of the loan and is commonly used by those who are expected to have more income once the final interest payment kicks in.
There are definitely different options available to you and our lender partners would love to chat to see how much you could save utilizing one of these programs!