How Can Buyers Benefit from a 2-1 Buydown?
WHAT IS A "2-1 BUYDOWN"?
A "2-1 Buydown" is where you or the seller pay a fee at the closing to reduce the interest rate on your mortgage by 2% in year 1 and 1% in year 2. This results in temporarily lowering your monthly payment and potentially making the home more affordable for you.
A "3-2-1 Buydown" can sometimes also be used, although a 2-1 Buydown is more common. A 3-2-1 buydown is where you or the seller pay a fee at the closing to reduce the interest rate on your 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 your interest rate and monthly payment during the first few years of homeownership, making the home more affordable for you. It can also allow you to benefit from owning a home now so you can start to build equity vs. waiting a few more years and continuing to rent. If the seller pays for the 2-1 Buydown, it would have a much greater impact on your monthly payment than asking the seller to reduce 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.
WHAT HAPPENS WHEN THE INTEREST RATE GOES BACK TO NORMAL?
In year 3 of a 2-1 Buydown, your interest rate would adjust to its normal "note rate." If market interest rates are the same or higher than they are today, you would just keep the loan and pay the normal payment. However, if a recession happens, market rates may come down again. In that case, you may be able to refinance at the then-current rates. Keep in mind that interest rates are cyclical. They tend to go up when the economy is doing well, and they tend to go down when the economy is doing poorly. Let me know if you'd like me to run some numbers and see if a 2-1 Buydown might make sense in your situation!
ARE THERE ANY TAX BENEFITS?
Seller-paid buydowns are tax-deductible to the buyer if the buyer itemizes their tax deductions. Meanwhile, sellers can deduct the buydown paid on behalf of the buyer against their capital gain when they sell the property. The seller-paid buydown is considered a "cost of sale." Please see IRS Publication 936 for more details.
The best way to gain a competitive advantage in today's changing market is to work with the right mortgage professional who can help you think through your options. Contact me so we can get started!
Source: Momentifi