What is a 2-1 buydown?
A two-one buydown is a financing option where the lender agrees to temporarily reduce your interest rate on the loan for a specified period of time. This reduction in the interest rate is usually achieved by a seller’s concession from the seller.
So here’s how it works.
Let’s say the initial interest rate is 6.25% out of a $400,000 loan. The first year you’re going to see a reduction in your interest rate by 2% points down to 4.25% which saves you $495 per month. In the second year, you’re going to see an interest rate reduction of 1%, or 5.25%, which could save me $254 per month. So after that second year, the interest rate returns back to the original agreed-upon 6.25% for the remaining part of the loan. The lender will qualify you based on the higher interest rate the 6.25% and now will take effect again at the beginning of the third year. The buydown is effectively escrowing the difference between the payment and what they’re going to be applying monthly.
So let’s say that the total concession on a $400,000 loan is $9,000. Let’s say that you’re going to refinance in a year. Any unused portion you can use to pay off your loan. That’s great news.
So before selecting any of these options, you want to make sure that you talk to your lender and let you know every single way to Sunday, how you can qualify. If you need some additional help, give me a call, and I can run you through these numbers to help you make sure that you get to the home of your dreams. We are Eddie Gutierrez and Cynthia Lucero, and we are here to help.