A 2-1 buydown agreement stipulates that during the first two years of the loan, the rate is lower, and during the third year it rises to its permanent rate, where it stays unless one opts to refinance down the line. (Photo: Unsplash).

Michaela Phillips, Synergy One Lending

Michaela Phillips, Synergy One Lending

In an effort to cool the red-hot housing market off, the FED increased interest rates to allow the housing supply to catch up. For first-time buyers looking to enter into the housing market, this can be both good and bad. Higher interest rates usually mean a more expensive mortgage. However, housing prices will start to dip as the home supply increases and there is less competition. That’s where a 2-1 buydown comes in.

What is a 2-1 buydown mortgage agreement?
At its core, a 2-1 buydown is another type of mortgage agreement between a home buyer and their lender. This agreement stipulates that during the first two years of the loan, the rate is lower, and during the third year it rises to its permanent rate, where it stays unless one opts to refinance down the line.

How does a 2-1 buydown work?
For most 2-1 buydowns, the mortgage rate is two points lower during the first year and one point lower during the second year, before rising to its normal rate. This real estate financing technique is used widely throughout the industry, but it is up to the lender to create their terms. Typically, fees that are charged for the 2-1 buydown are calculated interest based on the 1st and 2nd year. The interest is then prepaid by the seller or the lender.

Why do people opt for a 2-1 buydown?
Sellers often opt to offer a 2-1 buydown option to make their home more enticing. The lender calculates the amount of interest being deferred for the first and second year. The seller or the lender will pay this amount, and if the seller pays this amount, it goes directly to the lender at closing as a lump sum.

Home builders may also offer this type of financing when selling new homes in developments.

Pros and cons of 2-1 buydown
The benefit of a 2-1 buydown is clear. Homebuyers can get into a house earlier than their budget would allow because of a lower interest rate in the first two years. If they know their finances will trend upwards in the immediate future, this can be a fantastic choice to secure a home. On the flipside, if finances change drastically, the new home buyers may need to determine a way to sell their house and get out from under the increasing mortgage rates.

If you think this may be a good option for you, talk with a trusted lender before house shopping. A 2-1 buydown could open up your options and get you into your dream home.

By Michaela Phillips. Michaela is the Senior Lender for Synergy One Lending in Boulder. She enjoys teaching her clients the pros and cons of being a Real Estate Investor. Contact Michaela at 303.579.5517, e-mail [email protected] or visit michaelaphillips.com. NMLS: 312874.