How Can Sellers Benefit from a 2-1 Buydown?

WHAT IS A "SELLER-PAID 2-1 BUYDOWN"?

A "Seller-Paid 2-1 Buydown" is where you pay a fee at the closing to reduce the interest rate on the buyer's mortgage by 2% in year 1 and 1% in year 2. This results in temporarily lowering the buyer's monthly payment and making the home more affordable for them.

A "3-2-1 Buydown" can sometimes also be used, although a 2-1 Buydown is more common. A 3-2-1 buydown reduces the interest rate on the buyer's mortgage by 3% in year 1, 2% in year 2, and 1% in year 3.

WHAT ARE THE BENEFITS OF A 2-1 BUYDOWN?

A 2-1 Buydown reduces the buyer's interest rate and monthly payment during the first few years of homeownership, making the home more affordable for them. It has a much greater impact on the buyer's monthly payment than reducing the list price of the home. This could be a great negotiating tool because a greater percentage of homes listed for sale in today's market are seeing price reductions. A 2-1 buydown makes your house more affordable to a wider range of buyers who may have otherwise been priced out of the market.

HOW DOES A 2-1 BUYDOWN GIVE YOU A COMPETITIVE ADVANTAGE?

Offering to pay for a 2-1 buydown could give your deal a competitive advantage vs. other homes listed for sale in today's changing market. That's because interest rates have gone up significantly this year, creating an affordability crisis for many potential buyers. A 2-1 buydown could also save you the aggravation and financial loss of having to significantly reduce your list price in order to compete with other homes that may be listed for a lower price. Let me know if you'd like for me to run some numbers to see the specific impact that this strategy could make in your situation!

How 2-1 Buydowns Work?

A buydown is a real estate financing technique that makes it easier for a borrower to qualify for a mortgage with a lower interest rate. That lower rate can last for the duration of the mortgage (as is often the case when borrowers pay extra points up front to the lender) or for a particular period of time. A 2-1 buydown is one kind of temporary buydown, in this case lasting for two years.

In a 2-1 buydown, the interest rate will increase from one year to the next until it settles into its permanent rate in year three. To make up for the interest that they won’t be receiving in those early years, lenders will charge an additional fee.

Either a homebuyer or a home seller can pay for a buydown. That payment may be in the form of mortgage points, or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments.

Sellers, including home builders, often use 2-1 buydowns as an incentive for potential purchasers.

When to Use a 2-1 Buydown?

Home sellers may want to consider offering (and paying for) a 2-1 buydown if they’re having difficulty selling and need to provide an incentive to find a buyer.

Borrowers may benefit from a buydown if it allows them to buy the home, they want at a price they can afford. However, they will also want to consider what would happen if their income doesn’t rise fast enough to keep up with their future monthly payments.

Buyers should also make sure that they are getting a fair deal on the home in the first place. That’s because some sellers might increase the home’s price to make up for the cost of the 2-1 buydown.