A 2-1 buydown is a mortgage loan option where the seller or builder reduces the homebuyer’s interest rate for the first two years of the loan. This means that for the buyer, the interest rate is two percentage points less than the original in the first year, and one percentage point less in the second year.
Here’s an example. If your loan has an interest rate of 6.5%, the 2-1 buydown program would allow you to make monthly payments at a 4.5% interest rate for the entire first year of the mortgage. Then, in year two, your payments would be based on a 5.5% interest rate. Finally, once you hit year three and for the remainder of the loan, your payments would reflect the original 6.5% interest rate.
The buyer still has to qualify for making payments based on the original payment amount for the 6.5% interest rate, however this program gives them the ability to ease into the original interest rate over the first two years. This is beneficial because in most cases the first two years of owning a home are the most expensive. Besides the monthly mortgage payments, there are additional costs such as a down payment, closing costs, furniture, repairs, and upgrades to take into account during those first couple years of home ownership. So, it’s nice to have the option to gradually ease into the full interest payments.
Sellers can also benefit greatly from a 2-1 buydown. This can make a difference if they have a buyer who is on the fence, or if they are looking to sell the house as quickly as possible. Offering a temporary buydown can give homebuyers that extra push they need to make the purchase, without having to lower the listing price.
The way this program works is the difference is paid through a one-time fee either by the seller or builder, when closing on the home. This fee is usually deposited in an escrow account, and a small amount is paid out every month to cover the difference in the interest rate payments. This ensures a temporary lower interest rate payment for the first two years of homeownership.
Does easing into your mortgage payments sound interesting to you? Contact us at Georgia Platinum Mortgage to find out more.