In Changing Markets We Must Adapt
The Save the Rate 2-1 buydown is a great way to make owning in a higher rate environment affordable.
Seller’s can utilize this strategy to attract buyers. Buyers take advantage of a reduced payments for the first year or two.
The term 2-1 Buydown refers to a two year rate reduction. The term 1-1 Buy Down is a one year rate reduction.
How Does A 2-1 Buydown Work?
- 1st year buyer pays 2% less than the locked-in rate in interest
- 2nd year buyer pays 1% less than the locked-in rate in interest
- The 3rd year the rate returns to the locked rate.
- The cost of the buy down is paid by the seller
- The Funds paid by the seller are held in an escrow account and used to subsidize the buyers payment for the first 24 payments
- If the buyer refinances in the first 24 months any funds left over are returned to the buyer
Save the Rate Example
Buyer locks in a rate at 7% ……..With the 2-1 Buy Down:
Year 1 of payments buyer’s monthly payments are at 5% interest
Year 2 buyers payments are at 6% interest
Year 3 buyers payments are at 7% interest
Use the Calculator Below to Estimate the Seller Paid Cost
Save the Rate! 2-1 Buy Down Example
Conventional Loan - 5% Down Payment
Home Price: $459,000
Max Seller Concession 3% = $13,770
Seller Gross Net: $445,230
2-1 Buy Down reduces the monthly mortgage payments for the first 2 years of owning the home!
With a locked interest note rate of 7%….
Year 1 – Buyer mortgage payment is at 5%= $2340/mo principal & interest = $560/mo in Savings
Year 2 – Buyer mortgage payment is at 6% = $2614/mo = $267/mo in Savings
Year 3 – Interest rate returns to original 7% = $2901/mo
Total Savings over 2 years = $10,163
But how?!? So here’s how it works…
– Seller pays $10,163 in concessions specifically for the buyers 2-1 Rate Buydown at closing.
– The funds get put into an escrow account that gets drawn on each month to make up the difference between the 7% payment and the reduced rate payment for the first 24 months.
– If the buyer refinances in the first 24 months the funds in escrow are returned to the buyer
– Keep in mind the Buyer will have to qualify for the loan at the original rate of 7% for this strategy to work
The cost of the 2-1 buy down is included in the Max Seller Concession which are as follows*:
Conventional Loan 5% Down = 3%
FHA Loan 3.5% Down = 6%
VA Loan 0% Down = 4%
Soooo in alot of cases the buyer can include the cost of the buy down and still have room for additional seller paid closing costs if the seller is willing and able to pay them in the cost of the sale.
*Maximum Seller concessions vary when putting more than 5% down on a Conventional Loan
Now…. in this example we are illustrating a Conventional Loan at 5% Down so the Max Seller Concession is 3% or $13,770
Cost of the Buy Down is $10,163 which leaves $3,607 in additional concessions to assist in paying other buyer paid closing costs.
The trick to this method is estimating that the property will appraise for the agreed upon sales price of $459,00.
If the home does not appraise the seller may need to negotiate less in concessions to meet their net goal on the home. With that being said your Realtor can assist in looking at comparable sales in the area to assist in estimating the appraisal value.
The 2-1 Buydown can be a great way for a buyer to get into a home with a lower payment up front giving the market time to decrease mortgage interest rates. When (not if, because they will) rates decrease buyer can refinance to a lower fixed interest rate decreasing their payments for the life of the loan.
Seller’s can use this as a marketing strategy to sell their home faster in this market by calculating the cost of a 2-1 buy down in their listing price and advertising it with the listing.
Buyers can work with their realtors to negotiate this into their sales contract up front.
For Realtors this can be a helpful tool in their ‘New Market Toolbox’ to assist both sellers and buyers in getting optimal results in this changing market.
***fine print: This is an estimated example using made up rates and cost for illustrative purposes ONLY. To get exact numbers as a buyer or seller please contact us. ***
Want more info?
If you have questions or would like to explore this option we are happy to help!
You can call/text Erin at 774-563-5764 or email us at Bayerloanteam@emmloans.com