What is a “Temporary Buydown” and why should I care?
Why should I care about a temporary buydown?
You might be hearing a lot of chatter about “2-1 buydowns” which is a specific version of a temporary buydown. To all real estate agents, this loan product helps sell your listings without price reductions. Sellers, talk to your real estate agents.
If you’re in the market to buy a home, you really want to learn about this as it’s a great negotiating tool to create the lowest possible monthly payment.
What is a “Temporary Buydown?”
It is a mortgage loan where the interest rate has a temporary buydown, or reduced rate for a pre-defined period of time. In the case of a 2-1 buydown, a portion of the interest is prepaid for the first 2 years. The pre-payment (or “buydown”) can be paid by the seller as a concession or a lender credit. If the buyer wants to make that investment themselves, they can pay it.
What are the benefits?
- It’s a good alternative to sellers rather than lowering the list price of their home
- It has the greatest impact on reducing a buyer’s payment – biggest bang for the buck
- Creates affordable monthly payments in times of higher interest rates
- This loan is priced the same as a traditional mortgages
How it works?
- A 2-1 buydown temporarily lowers the interest rate on a mortgage for the first two years
- The temporary rate is typically two percentage points lower during the first year
- The rate is one percentage point lower in the second year.
- The the standard rate applies year 3 and forward.
- The cost of the temporary buydown is calculated by totaling the difference in lower monthly payments over the first 2 years compared to the standard rate.
Let’s take a scenario with an initial list price of $500,000 and a buyer obtaining a loan at 5.5% with a 20% down payment.*
A $8,632 seller credit would buy down the rate from 5.5%* to 3.5% the 1st year and 4.5% the 2nd year. Thus lowering the buyer’s payment –$474/mo for months 1-12, then –$244/mo for months 13-24. The total savings for the borrower is $8,632 in the first 2 years of the loan.
Seller Cost = $8,632
Buyer Savings = $8,632 over 24 months. -$474/mo for months 1-12, then -$244/mo for months 13-24
To see how this temporary buydown strategy compares to lowering the sale price of a home or even a permanent rate buydown (known as paying upfront points), visit the E5 Home Loans 2-1 Buydown Page.
If you have questions or want to run a calculation for a home currently on the market, contact us for a free quote.