How A 2-1 Mortgage Buydown Works

As of November 2022, interest rates are hovering around 6.8% in the United States. That’s up from just above 3.2% in January 2022. While the Federal Reserve is working on cooling inflation, the housing market is working hard to adjust to rates and still provide the American dream of home ownership.

If you’re in the market for a new home, interest rates on new 30-year mortgages may seem daunting. There’s another option available to qualified buyers, and that’s a 2-1 buydown.

What’s a mortgage buydown? Let’s break it down:

  1. A 2-1 buydown is a specific kind of financing. Mortgage rates are determined by the lender, not the federal government. But they are influenced by market trends, regardless of sector. Because of rising interest rates, home builders and lenders concerned with closing mortgages amid rate hikes have leverage to offer a buydown, which gives new buyers a lower rate for two years.

  2. Buydowns are temporary, but impactful. Typically buydowns are tiered between one to two years. In the first year, it’s typical to see a mortgage at two full percentage points less than the market rate. In the second year, mortgages are 1% less than the market rate. The expectation is that after two years, buyers will go back to the “normal” rate. This results in a mortgage payment adjustment, so buyers should budget for, and be aware, that their mortgage payment will likely increase.

  3. It’s a good negotiation point when buying/selling. Gone are the days of asking home builders and sellers to pay closing costs. The market is simply too competitive. But since the market has cooled, sellers and home builders realize that they need some incentive to attract buyers. If you’re looking for a negotiation lever to pull, asking for the seller to provide a buydown may be key.

Here’s an example of a 2-1 buydown from our friend Floyd Walters at BWA Mortgage. This instance is if the current 30 year mortgage rate is 6.5%.

On a 2-1 buydown you would pay the following rate:

  • 4.5% for the first year
  • 5.5% for the second year
  • 6.5% for the remaining years of the loan

There are lots of variations of the product but in its simplest form, a seller would pay the one-time fee of 2.38% of the loan amount to buy down the rate.

Here’s how that might look on a $1,000,000 purchase with a buyer putting 20% down and needing to borrow $800,000.

$800,000 loan amount x the 2.38% buydown cost = $19,040.

So for a seller, that’s equivalent to accepting a $980,960 sales price, so a 2% reduction in asking price.

Working with a knowledgeable agent is the key to not only finding the right home but finding the best deal that aligns with your finances. If you have questions about what a buydown could mean when purchasing your next home, let’s chat. Our team would love to work with you. Call us today! 626-714-6808