When we start to see interest rates rising, borrowers look to lenders for products that can help them achieve their goals of affordable homeownership. A 2-1 buydown is a solution that can do just that for certain homebuyers. A buydown is a financing tool that makes it easier for borrowers to qualify for a mortgage by “buying” a lower interest rate. The lower interest rate can last the duration of the mortgage, or it can be temporary. A 2-1 buydown is a temporary option that lasts only two years.
What is a 2-1 Buydown Mortgage
If you choose to go with a 2-1 buydown, your interest rate will be reduced for the first two years of your mortgage only. During the first year, the rate will be reduced by 2%. It will be reduced by 1% the following year, and in the third year, it will return to the original rate. The cost of the buydown is paid during closing and placed into an escrow account. The escrow account is used to cover the difference between the reduced payments and the final payment amount.
A 2-1 buydown is often an incentive offered by home sellers when they are having difficulty selling their home in a buyer’s market. The buydown can be enticing to homebuyers and can help the property sell faster. The proceeds from the sale of the home will cover the cost of the buydown when offered by the home seller. Homebuyers and home builders can also cover the cost of the buydown. When in a seller’s market, incentives don’t need to be offered to sell a home, so most buydowns will be paid for by the homebuyer. In some cases, parties may choose to split the cost of the buydown.
What Type of Borrower Would Benefit From a 2-1 Buydown?
Mortgage options like the 2-1 buydown are less common than typical mortgages. This generally means that they appeal to individuals in specific situations. So what type of homebuyer would find a 2-1 buydown to be an advantageous option? Borrowers whose income will increase over the next couple of years are prime candidates for a 2-1 buydown. The final mortgage payment may be difficult at their current salary, but as income increases, the same payment will be far more manageable. Similarly, if a borrower’s partner will be returning to work during the first two years or the mortgage, the lower initial payment can be valuable until the partner returns to work.
Some borrowers may want to lower their initial payment but want a fixed-rate mortgage rather than an adjustable-rate mortgage. A 2-1 buydown can achieve that goal. Other borrowers may wish to keep payments lower initially so that they can put more money towards upgrades and repairs during the first couple of years. Borrowers with higher credit scores may also find that a 2-1 buydown can be beneficial for their financial situation.
While these scenarios might make the 2-1 buydown appealing, it is important to note that if income does not rise as anticipated, or something prevents a spouse or partner from returning to work, you may find yourself in a difficult situation. The best thing to do is speak with a mortgage professional at New Horizon Mortgage, Inc. so that you can get the best advice for your own unique situation. If you are interested in 2-1 buydown options in Austin, Pflugerville, Round Rock, Cedar Park, Leander, San Marcos or the surrounding areas, contact New Horizon Mortgage, Inc. today to find out how you can qualify.