The downside for homebuyers is the risk that their income won't keep pace with those increasing mortgage payments. In that case, they might find themselves stretched too thin and even have to sell the home.
The buydown agreement must provide that the Borrower will not be relieved of the obligation to make the full monthly Mortgage payments required by the terms of the Mortgage Note if, for any reason, the buydown funds are not available or the buydown funds are not paid.
To subsidize the borrower's reduced monthly payments, it typically costs a percentage of the total loan amount to reduce the interest rate. For example, on a $500,000 loan with a 6% contracted interest rate, the total cost of the buydown for the first and second year would be about 2.2% of the loan amount.
This structure makes homeownership more affordable in the early years, especially for first-time homebuyers or those stretching their budget to buy a larger home. The upfront savings during the first two years can help cover other expenses like furniture, renovations, or moving costs.
The requirements for a 2-1 buydown vary between lenders, but typically require a higher credit score and/or a higher down payment in order to qualify for the lower interest rate.
Does a 2-1 Buydown Require Extra Funds at Closing? Yes, you will need to provide extra funds at closing to cover the cost of the buydown. This is an upfront fee that pays for the reduced interest rates in the first two years.
Qualified borrowers could see a monthly mortgage payment of principal and interest between $3,043.80 and $4,029.80 for a $600,000 mortgage loan right now.
One common question borrowers have is, “Can you refinance after a 2-1 buydown?” The answer is yes; refinancing is possible and can be a beneficial option for many borrowers.
Consider the following example for a 30-year loan: On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.
A borrower may purchase points, which lower the interest rate by a certain percentage. In other cases, the lender or seller will pay for a temporary buydown to help close the deal.
And here is even better news: The money for the temporary buydown goes into an escrow account and is applied to your loan every month during the buydown period. If you refinance or sell during that period, the unused portion gets applied to your home loan, reducing the balance of your loan.
A: No, the borrower is required to qualify at the full interest rate and payment. Q: Does the Borrower and Seller/Builder need to sign a buydown agreement? A: Yes, all parties are required to sign the Temporary Buydown Agreement at Closing.
The 2-1 Buydown is ideal for those looking for short-term payment relief, while the Permanent Buydown offers long-term savings for those planning to stay in their homes for many years.
ARM plans with an initial interest rate period greater than three years (Plans 4927, 4928, and 4929) can be structured as either 3-2-1 or 2-1 buydowns (or other allowable structures per B2-1.4-04, Temporary Interest Rate BuydownsB2-1.4-04, Temporary Interest Rate Buydowns).
Rates could come down.
This is perhaps the biggest drawback of 2-1 buydown mortgages when you utilize them when interest rates are high. If rates come down, your locked rate could be much higher than the new current market rate, meaning an ARM would have been a better choice.
For sellers, a 2-1 buydown can attract more offers at higher prices and get their homes sold faster. In turn, this could lead to higher net proceeds for the seller. Buyers can afford more if sellers make concessions to help reduce the loan cost and the monthly mortgage payment for the buyer.
With FHA 2-1 BUYDOWN, you can enjoy lower interest and mortgage rates. You will also have the option of buying down your interest rate for the first two years of homeownership. This means that you will get a rate that is two percentage points lower for the first year and one percentage point lower for the second year.
For a $600,000 home, you'll likely need a very good to excellent credit score: 760+: Best rates and terms. 740-759: Slightly higher rates.
Experts often advise that you spend no more than approximately one-third of your income on housing costs. That means you can triple $64,800 to get a clearer picture of what the annual income requirements would be in order to comfortably afford a $900,000 home: approximately $194,400, at a bare minimum.
As noted above, your estimated monthly payment for a $500K mortgage will be $3,360.16, assuming a 30-year loan term and an interest rate of 7.1%. But this payment could range between $2,600 and $4,900 depending on your term and interest rate.
What is the Process of Getting a 2-1 Buydown? Once you know how much the 2-1 buydown will cost for your purchase, you will then ask for that amount as a credit from the home seller or builder. Depending on what loan program the buyer qualifies for, a seller can offer a certain amount in credits or concessions.
The buydown interest percentage is the total of the interest for both years. That is, the buydown is 2% in the first year and 1% in the second year, for a total of 3%. The formula for calculating buydown points is: buydown points = (loan amount x percentage) / 100.
The Short Answer. Making 2 extra mortgage payments a year can lead to substantial savings on interest and help you pay off your mortgage years earlier.