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.
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 2/1 buydown program is a financing option that offers a lower interest rate for the first two years of your mortgage term. When you choose this program, your interest rate will be 2% lower in the first year of your mortgage and 1% lower in the second year.
Buydown Costs = Unpaid Interest
The cost of the 2-1 buydown is the sum of the unpaid interest for the first two years. Over the first two years, Joe has “saved” $9,323.18 ($6,167 + $3,156) of interest. This amount is the total amount the seller has a requirement to pay at closing to secure the 2-1 buydown.
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.
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.
While the numbers in a temporary buydown refer to the reduction of interest points in year one (2 percentage points) and year two (1 percentage point), the first number in an ARM refers to how many years your rate is locked, and the second number refers to how often it can change after that.
The seller's payment is used to “buy down” the buyer's interest rate for the first few years of the loan so the buyer only pays what would have been owed to the lender under a reduced interest rate. The seller's payment is considered a seller credit.
Except as otherwise provided in this agreement, the buydown funds are not refundable. The Borrower's only interest in the buydown funds is to have them paid over and applied to payments due under the Note along with payments made by Borrower.
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.
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.
A buydown temporarily reduces your interest rate, saving you money and lowering your monthly payments during the initial loan term. Choosing a buydown may allow you to pay less for the home than the seller's listing price. It could make sense for homebuyers whose income will increase in the years to come.
A 3-2-1 buydown mortgage defined
It gets its name from the variable rate of reduction during those first three years: 3% for the first year of financing, 2% for the second, and 1% for the third (and final) year of reduced-rate payments. From the fourth year onwards, you'll pay the full interest rate.
Compass Mortgage's 2-1 buydown loan program requires a long-term, fixed-rate mortgage, such as a conventional, FHA or VA loan. The seller, builder or buyer must pay the up-front cost, which can either be in the form of a lump sum that is deposited into an escrow account or as mortgage points.
One option available is a seller-paid rate buydown, wherein sellers pay down points to lower the mortgage rate for purchasers. The upside to this: Buyers can pay a lower rate for a few years and sellers can avoid having to make a price reduction on the cost of the home.
Saving money on closing costs
Buyers can ask for seller concessions, negotiating for the seller to cover some of their costs. They can also see if they qualify for any local, state or federal assistance programs that can help cover both down payments and closing costs.
The benefit of a 2-1 buydown is that you have lower mortgage payments for the first two years of your loan, making it easier to afford a home. Knowing how much your payments will be in the first two years, and then comparing them to the payment you'll have in the third year and beyond, can provide invaluable insight.
In today's mortgage market, refinancing a 2-1 buydown could be a smart move. With interest rates still fluctuating, locking in a lower rate could save you a significant amount of money. Additionally, refinancing gives you the flexibility to adjust your loan terms, consolidate debt, or access your home's equity.
Who Pays for a Buydown? Pretty much anyone involved in the process of buying or selling a home can pay for a mortgage buydown—including the seller, the buyer or even a builder. Sometimes, a seller will offer to pay for a buydown so their listing will have a little icing on the cake.
To comfortably afford a $600k mortgage, you'll likely need an annual income between $150,000 to $200,000, depending on your specific financial situation and the terms of your mortgage. Remember, just because you can qualify for a loan doesn't mean you should stretch your budget to the maximum.
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.