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.
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 ideal candidate for a 2-1 buydown loan may be someone who: Has a partner or spouse who is going to go back to work in the next two years. Wants to lower their monthly payment for the first two years of being a homeowner so they can pay for improvements or repairs.
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.
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.
Buydown funds are not refundable unless the mortgage is paid off before all the funds have been applied. Buydown funds cannot be used to pay past-due payments. Buydown funds cannot be used to reduce the mortgage amount for purposes of determining the LTV ratio.
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 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.
The party funding the buydown, whether it is the seller, builder or buyer, kicks in enough money to reduce the buyer's mortgage rate by 2% the first year and 1% the second year as part of that party's closing costs. The mortgage carries the standard rate and payment in years 3-30.
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.
You can buy down your interest rate by up to 1.0 percent to reduce your interest costs and get a lower payment. Before you choose to complete a rate buydown, make sure you take the time to compare your monthly savings with how long you plan to own the home.
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.
In an interest rate buydown, the seller pays mortgage points on the buyer's mortgage, lowering the interest rate. Permanent buydowns are more beneficial than price reductions for the buyer and the seller. Also called seller buydowns, they're better for buyers who plan on living in the same house for a long time.
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.
A 2-1 buydown offers more predictability. It's a fixed-rate loan, meaning you'll know what your payment will be during the first year, second year, and years 3-30.
Common buydowns.
1-0 Buydown - The lower interest rate lasts 1 year into the loan, after which the interest goes back to the regular contract rate. 2-1 Buydown - The lower interest rate lasts 2 years into the loan, but the discount changes.
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.
Pros and Cons of a 3-2-1 Buydown Mortgage
Buydown loans can be advantageous for borrowers who may not have the needed funds today but expect to have higher incomes in future years. Over the first three years of lower monthly payments, borrowers can set aside cash for other expenses, such as home repairs or remodeling.
1-1 buydown: The interest rate is reduced by 1 percentage point for the first year of the loan, and then returns to the original rate after one year. 2-1 buydown: The interest rate is reduced by 2 percentage points for the first two years of the loan, and then returns to the original rate after two years.
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.
The borrower typically pays for a 2-1 buydown. However, some sellers may offer to pay for the buydown as a part of the purchase agreement.
A: Under California law, particularly under Vehicle Code Section 11736(c), you are generally entitled to a refund of your deposit before signing a vehicle purchase agreement and taking delivery of the vehicle.