During the home loan process, you may hear the term 2/1 buydown thrown around, but what exactly does this mean? This quick article will help you understand what a 2/1 buydown is and how you could benefit from one when purchasing your home.
A 2/1 buydown loan is where you can temporarily reduce your interest rate over 2-3 years to help you ease into homeownership. Often, a new mortgage payment can be much larger than your current rental payment. While this is offset by the fact you are building equity, it can be an obstacle for many families to get started. A 2/1 buydown loan allows you to get into a home with a manageable rate and slowly increase over 2-3 years (In intervals of 1%), similarly to how your rental payment increases with market value.
The most common form of a 2/1 buydown loan is funded by either the builder or seller of the home and is included as an agreement in your purchase contract. This will be negotiated by your real estate agent during the offer process and will be paid for at the closing table. While this is not common in all types of markets, it is a great tool for families looking to buy but is worried about overextending themselves.
A common misconception is that this only benefits the buyer of the home, but that is simply not true. During a buyer’s market (when there is an excess of properties and not enough buyers) it is common for properties to sit on the market for months. The longer a property sits on the market, the lower the perceived value of the property becomes. Funding a 2/1 buydown for the borrower can incentivize borrowers to move on a specific property and prevent the home from taking huge price concessions long term.
This helps the buyer because they can manage their housing expenses slowly and carefully. This should not be treated as a tool to buy a home outside of your price range but instead, manage your monthly expenses. This 1% increase is much more manageable and imitates what the renter is used to (yearly increases to meet average market rental payments).
It also means you can start building equity faster and get into a home before it is too late. If you are in an area that has seen a lot of growth, it could help you become a homeowner before you get priced out of the market.
Your lender and real estate agent can help you negotiate this. Like closing cost concessions, this is not necessarily an expense the seller will want to pay. However, it is up to your real estate agent to help the seller understand how this can be mutually beneficial.
Understanding your different options will help you determine the exact right loan product for you. Whether you are suitable for a 2/1 buydown will depend on a variety of factors such as your financial situation, the market you are buying a home in, and the real estate agent’s ability to negotiate. Interested in learning more? Click here and get started today.
