Product Update//2:1 Buy Down

2:1 Buy Down Program

Hey, it’s Brian Manning. I’m gonna start doing some updates here just based on programs that are available and how they can help your business or clients that you’re working with or if you’re a buyer, give you information on products that are available.

What we’re going to talk about today is going to be the 2-1 buydown. There’s different variation of this program. There’s 3-2-1 buydown, a 2-1 buydown, and a 1-nothing buydown. So… Let’s just talk about quickly what the programs are. 3-2-1 buydown. So, let’s just say your interest rate on a 30-year fixed is 6.5%. For the first year, your interest rate is 3% lower.

So, if your interest rate is 6.5%, for the first twelve months, your payments are based off a monthly payment with an interest rate of 3.5%. For the second twelve months, so months 13 to 24, your interest rate is going to be 2% lower. So, it’s going to be… If your interest rate is 6%, that’s a 4.5% payment for the purpose of calculating the monthly payments. And then for month 25 on… I’m sorry… So 25 to 36, it’s going to be 1% lower. So, if you have a 6.5% interest rate, now your monthly payment is based off a 5.5% rate. And then for month 37 on, if your interest rate was 6.5%, now, you have the normal payment for the remaining life of the loan. If it’s a 2-1 buydown, very similar for the first year. Your payments are based on a rate that’s 2% lower.

Second year 1% lower. Year three through 30 are the normal interest rate. One thing to know about this specific program is that the cost for the buydown has to be paid for by the lender, the realtor or the seller, for seller credit. A buyer cannot pay for this cost on their own. I just want to show you really quick an example of how it works here. This is an example of a 2-1 buydown. So, let’s just say you have a loan amount of $600,000. Then your loan amount of $600,000, your interest rate is 6.5%. It’s a 30-year fixed. So, normally, your principal and interest payment on this would be $3,792 per month. But on the 2-1 buydown, for the first year, your interest rate and your monthly payments are based on a rate of 4.5%.

So, it’s a payment that’s $752 less per month. And then for months 13 to 24, it’s a payment based on a rate that’s 1% lower. So, that’s 5.5%, that’s $385 per month savings. And then for years three through 30, that’s the remaining portion of the regular payment is 6.5%. The total cost for this is $13,655. So, if you’re making an offer and you’re asking for a seller credit for this 2-1 buydown, you’d be asking for a credit of $13,655. Something I really love about this program that’s very important… is the functionality of how the money works, right? So… In this particular scenario we’re looking at the cost of the buy down is $13,655.

So, what happens is at closing, that 13,655 is taken and set aside into an escrow account. Every month as the buyer makes the payments, they’re actually making the payment as if the payment was made on their 6.5% interest rate. But what happens is if you’re making a payment based on a 6.5% rate, then some of that money that’s stored in the escrow account is taken out, and that’s being used to offset part of the monthly payment.

So, every month, you’re still technically making the payment of like a normal 30-year fixed 6.5% of this example. You’re just getting money pulled out of this escrow account every single month. It’s kind of contributing to the monthly payment and it’s helping you have a lower payment for the first 2 years under this 2-1 buydown example. Well… Let’s just say we set up a 2-1 buydown today and rates go down because we do anticipate rates moving down to the 5% range in the middle of 2023, rates move down and now you want to refinance. What happens?

So… If you have, say, $10,000 left in an escrow account for the buydown that you haven’t used, when you go to refinance, the principal balance of your loan is going to be reduced by the money that is left in that escrow account. I like that because if you get money now from a seller, you use it for 2-1 buydown and you go to refinance in the future, you don’t lose that money. You get it because you get to get your… You get to get… You get your principal balance reduced by the money that’s left in the escrow account that’s managing that 2-1 buydown. Whereas if we look at just like a straight buydown… Straight buydown, meaning today’s rate is 6.5%, you get a seller credit, you buy that rate down from 6.5% to 5.5%.

Middle of next year, rates drop to 5% and you want to refinance. Well, the funds that were used at closing for that straight buy down, you never get to recoup those. And that’s kind of a sum cost or money you don’t get to recoup. Whereas the 2-1 buydown, you get the money back and you get it in the form of a principal reduction because it reduces the balance that gets paid off at closing.

So, I’m a huge fan of the 2-1 buydown for that reason because of our anticipation of rates moving lower in 2023. If you have any questions, give me a call, text me. I’m more than happy to help you. If you’re going to make an offer and you want to figure out what the cost of the 2-1 buydown are so you can go to the listing agent and then your offer has the correct amount there, reach out to me.

I’m more than happy to run the calculations for you. It’s a really great program. We’re doing a ton of them right now. I think it’s very beneficial because of the monthly payment reduction, and it’s certainly helping buyers get into a home out of monthly payment that they’re just extremely satisfied with. I’m going to do more of these updates on just different programs and products that are coming out to really help you stay updated what’s going on in the marketplace. And hope you have a great day.



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