Want a Lower Payment and a Lower Rate Below Market…A 2-1 Buydown May be the Trick!…(Read Below for More Info)
What is a 2-1 Buydown?
A Buydown temporarily reduces the mortgage payment for the borrower. This happens because the seller offers a credit that pays the difference between the full P&I payment and the reduced P&I payment. The seller only needs to provide the credit and the lender handles supplementing the payment. So, it’s a seller credit used in a different way!
Why would a seller want to give this credit to the buyer?
A Buydown is paid for by the seller instead of the traditional lowering of the sales price when a listing doesn’t sell. This potentially attracts more buyers because they get a much lower rate and payment for the first 2 years. It also provides a lower payment helps buyers ease into their new home given all the new expenses they may have. It also allows them to refinance when rates drop.
This also allows the seller to maybe not have to lower the list price. This keeps home values as high as possible! Since this is also a cost to sell the property then the sellers potentially get a tax break by lowering any capital gains (of course sellers should always contact their tax advisor on this).
You can also have a situation where the list price is fine and the sellers don’t need to lower it or give a credit to the buyers. So then the buyers can counter to increase the sales price to cover the buydown subsidy and then have the sellers give that buydown subsidy! Sellers get the same net sales price and of course the buyers are getting a much lower payment on their first 2 years! Of course to do this the property has to appraise for the higher purchase price. The buyers have to have the extra couple thousand for the down payment because of the slightly higher purchase price in order for this scenario to work.
Basically this is the borrower “financing” their buydown with the higher purchase price in order to get the seller to give the credit to fund the buydown!
Here Is an Example for Educational Purposes Only:
Interest Rate is 6.50% Loan Amount is $715,000
P&I at $715,000 with a rate of 6.50% is equal to $4519.29/month
If a Seller credits the buyer with a subsidy, this amount can be applied to the buydown and reduce the 1st, 2nd or 3rd year payment, depending on the subsidy amount.
Let’s say a seller agrees to supplement the payment difference for years one and two.
The first-year payment for the borrower would be a rate of 4.50%. The second-year payment for the borrower would be a rate of 5.50%. Years 3-30 would be the normal rate of 6.50%.
Year One@ 4.50% = $3622.80 – P&I/Month
Year Two@ 5.50% = $4059.69 – P&I/Month
- Keep in mind that the borrower still has to qualify at the NOTE RATE and not the buydown rate so in this scenario the borrower qualifies at the note rate of 6.50%
- In this scenario with the 1st year rate being 4.50% and the 2nd year rate at 5.50% then this means their average rate for the first 2 years is at 5.00% which is still 1.50% LOWER than the current market rate!!
The difference between the Normal Payment of $4519.29 and Yr. One of $3622.80 is $896.49/Month.
The difference between the Normal Payment of $4519.29 and Yr. Two of $4059.69 is $459.60/Month.
If the Seller offers a subsidy of $896.49 x 12 = $10,757.88 (for 1st year) plus $459.60 x 12 = $5515.20 (for 2nd year) they would offer the borrower a total subsidy of $16,273.08 which would pay for the payment difference the first two years.
This strategy helps a homebuyer ease into their house payment and frees up funds for other things that would have normally gone to a house payment. NOTE: Seller credit cannot exceed maximum seller contribution for program selected.
For More Info, please contact me.
Senior Mortgage Advisor
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Note: Interest rates and loan programs quoted are subject to change without notice or until locked and approved by lender.