Insurance and interest rates are up, but there's a way to reduce your monthly payment when you buy a home: a 2/1 Buydown. The 2/1 Buydown sounds like a BOGO advertising campaign, but it is actually a mortgage program to help reduce the amount you pay in interest each month.
There's loads on the web about it, but a lot of it is hard to understand. No worries, I'm here, and I'm fluent in everyday human.
Sellers pay attention. This is a great tool to use to make your property stand out when we list it together.
The 2/1 Buydown program simplified
A 2/1 Buydown program is a way to make it easier to buy a house by lowering your monthly mortgage payments for the first couple of years you own your new home.
The good news? The seller can pay for the cost of the mortgage reduction. This makes the 2/1 Buydown program a good negotiating tool for smart buyers. It's also a smart carrot to dangle in front of the nose of your buyers when you list your home.
The 2/1 Buydown is available to just about anyone, and there are no strings attached. No balloon payments. No adjustable rate. Just a plain old regular mortgage with upfront perks.
Say what?! Here's how it works:
Let's say you're buying a home and financing $300,000. You get a 30-year mortgage to pay for it. Normally, you would have to pay a certain amount of money each month to cover your mortgage. But with a 2/1 buydown program, the bank (or seller) will help you pay a lower amount for the first two years of your mortgage by lowering your interest paid.
Let's say the mortgage is about $2000 a month. With the 2/1 Buydown, the seller can agree to pay to lower your interest rate from 7% each month to :
5% the first year
6% the second year
This means that instead of paying the full mortgage payment of $2,000 per month, the buyer would only have to pay:
$1610 per month for the first year (saving $4,680 in year one)
$1799 per month for the second year (saving $2,412 in year two)
$2,000 per month for the remaining years of your 30-year mortgage (with the buyer now paying the full amount)
What happens next? In the third year, the mortgage payments will go up to the regular amount (in this example, $2,000 per month). But by that time, the difference of $400 a month might not seem so big. The buyer might have a better job or more money saved up, so it won't be as hard to make payments.
Plus, buying a home also tends to come with other expenses like paint, furniture, kitchen items, home upgrades like a fence for Fido, etc. Those purchases are usually made in the first couple of years you live in a place. So wouldn't it be grand to save money on the mortgage those first two years? You bet!
The goal is that by the third year, when your mortgage rate is stable but no longer reduced, your situation has changed enough that the dollars aren't so tight. For example, your expenses may be reduced, or you may find a more competitive insurance rate over those 24 months.
Alternatively, interest rates may be reduced, and you can refinance at that lower rate. You may come into an inheritance. You may find a significant other or a roommate. My favorite? You may get a raise; I like this one because betting on yourself is almost always a sound bet.
How does this work for the seller?
The seller agrees to pay the mortgage down prior to closing. This is all typed up in the offer itself from the buyer or in an amendment that follows should the buydown not be typed up in the offer.
The 2/1 buydown can be added at any time prior to the sale so long as both parties agree, for example, following other negotiations in the deal, like inspections.
The funds are paid by the seller to the buyer in the form of a credit at closing. This means that they come from the money the seller makes from the sale of the home. They're credited to the buyer at closing.
They often total around 2 to 2.5% of the sales price of the home. That said, there are many programs available with small nuances, so do your homework whether you are the buyer or the seller.
The benefit for the seller?
A 2/1 Buydown reduces monthly payments without reducing the price of the home. Reducing the mortgage payment by reducing the sales price of the home alone would require a steep reduction. A good rule of thumb is that a $10,000 reduction in sales price only reduces the mortgage by about $50 each month.
Instead, the 2/1 buy down helps the buyer buy down how much interest they pay on their loan each month. That's why it's called a buydown. It allows them to get settled, stress less about repairs, and provides the buyer with options down the road, all while costing the seller far less money.
The too long, don't read version?
A 2/1 buydown program is a way to make it easier to buy a house by lowering monthly mortgage payments for the first couple of years. The bank or seller pays down your mortgage for the first two years, which can make it easier to afford your monthly payments when you're just starting out.
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Voted Neighborhood Favorite by Nextdoor, Team Cool Murphy is a top-producing, licensed real estate team based in New Orleans, brokered by Cool Murphy, LLC.
Celebrated for her next-level creative approach to real estate, Elisa Cool Murphy is an award-winning, top-performing agent in New Orleans and the founder and leader of Cool Murphy, LLC.
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