what is a 2/1 buydown?

Question

I was told as an incentive by a builder that the condo for sale would have a 2/1 buydown on the interest rate. Anyone familiar with this? Can the savings be substantial?

Answer 1

market interest rate is 6%. Your new 30 year fixed rate loan will have a rate of 5.5% the first year and then a rate of 6.5% the second to the 30th year. You get a lower rate for the first year and then a fixed rate that is almost as good as you would otherwise get. There is also a 3-2-1 buydown loan. Forget it. Its usually not a great deal, just a way for the builder to seem like they are giving you a great benefit when they are not. Get several quotes for several loans and compare the APRs (not the interest rates). Get a good mortgage broker to help you out.

Answer 2

Actually, it works a little differently than described. Buying down the rate is done by prepaying interest on the loan for a period, usually two years.

Let's say you got a 7% interest rate on your loan which, in your case, came to $700/month in interest. That means every 1% of interest equals $100.

As part of your closing deal, your seller buys down your rate for 2 years in a 2/1 buydown. Your seller will do this by prepaying 2% of the interest for the first year, and 1% for the second year. In our example, 1% interest is $100. So the seller will give the lender $3600 up front - $2400 for the first year, $1200 for the second.

In the first year, every month, $200 will be taken from that money, put with the additional $500 interest you paid and used to pay your loan. In the second year, $100 will be taken from that money, put with the additional $600 interest you paid, and used to pay your loan. In the third year, all the prepayment is exhausted, so you start paying the full amount. The loan program lets you ease into the full payment.

A buydown does make sense if it is being paid for by a third party, like the seller or the bank. It usually does not make sense if you are financing the prepayment amount.

Always be sure you can handle the full payment so that you don't wind up in a bad financial situation two years from now.

Although the bank holds onto the buydown money, it is yours. If you were to sell the house after one year, the bank would have to give you the remaining balance in the fund, which in our example would be $1200.

Answer 3

Check the exact terms with the lender - in essence you get a reduction in the first year of the loan by paying some points up front (which the builder is probably paying for). It normally adjusts each year until you're back up to the full rate - which many times is the same or just slightly higher than market rate at the time of the loan.

It is great for someone who realizes that payment will increase and are prepared for those increases

Answer 4

No one calls it a DPA in the industry. Yes, you can use down payment assistance programs in combination with an FHA loan...it's done all the time. Just make sure you read all of the conditions of they payback...most of them have a 5 to 15 year ownership requirement before it's forgiven....otherwise, you have to pay it back if you sell or refinance the home. Here is the drawback to an FHA buydown: The END fixed rate that starts in year 3, is HIGHER than if you had done a fixed rate to start with. So if you can afford a fixed rate, then do a fixed rate from the beginning...or else in the long run, a 2/1 buydown is actually not going to save you a dime.

Answer 5

A mortgage-financing technique where the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage. The seller of the property usually provides payments to the mortgage-lending institution, which, in turn, lowers the buyer's monthly interest rate and therefore monthly payment. The home seller, however, increases the purchase price of the home to compensate for the costs of the buydown agreement.

In a "Sellers Market" the seller might raise the purchase price to compensate for the costs of the buydown but in most markets it would not be to their advantage to use a buydown as an enticement if they are going to offset the benefit but raising the price. In most cases, the buydown does not even involve the seller. It is an arrangement between the lender and the buyer.

You may also use the buydown option on a refinance.

Answer 6

If you buy two, you get one down