09 Mar The 2-1 Temporary Buydown
I’m sure we have all heard about the 2-1 buydown at this point, pretty much every lender is advertising it, however, I’m still getting asked what it is exactly. First of all, it is not an ARM, so let’s stop that rumor from spreading any further. It is actually an escrow account that is set up on behalf of the borrower, and paid for by the seller, to reduce the mortgage payment for the first 2 years of the loan. The first year of payments are 2% lower than the note rate, the second year is 1% lower than the note rate, and the third year and beyond are at the note rate.
Many people ask “why don’t you just use that money to do a permanent buydown?” There are two reasons, first, the rate reduction is much less. 2 discount points will only buy you a ½ to ¾% reduction in rate. Secondly, discount points are a sunk cost the minute the loan closes, and the break-even is typically between 3 – 5 years. So, if rates go lower in the next 12 months and we refinance the mortgage, the discount points were a giant waste of money. The beauty of the temporary buydown is that if someone refinances within the first two years, any unused funds in the escrow account can be used to pay the closing costs or reduce the principal balance.
The 2-1 buydown is my favorite loan product in this high interest rate environment because it makes the mortgage payment reasonable in the near future, while giving interest rates a chance to come back to earth. Rates peaked last Oct-Nov, and have been on a downward trajectory since. My goal is to re-finance every 2-1 buydown mortgage within 18 months to a permanent rate that is at or below the first year’s payment. Given the last 3 M/M inflation numbers, and the drop in the Y/Y inflation lately, it looks like we are on track to make that a very real possibility.
The last few months have been the ideal market for using the temporary buydown to get people into a home. However, the real estate market is shifting. As more buyers enter the market and inventory remains tight, a seller’s market is a less than ideal time to ask for seller concessions, but still possible. Instead of offering at or below asking, perhaps an over asking offer with seller concessions to cover the buydown is the play. It will help buyers enormously to be able to afford the payment, and the slightly higher loan amount only adds a trivial amount to the monthly payment.
Before we get into the busy season and competition makes it impossible, let’s get the homebuyers that need the help into a home using a 2-1 buydown before it is too late.
– JP Sicotte – NMLS #1032058, Branch Leader @ Movement Mortgage