Mortgage interest rates have risen significantly in the past year, which has made it increasingly difficult for buyers to find a home within their budget.
Last year around this time, 30-year, fixed interest rates were around 3%. Today, they are stretching higher than 7%.
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To put it into perspective, the rate jump means the average buyer today is paying over $900 more per month on their mortgage.
We have good news for those disappointed with current rates: You may be able to take advantage of a 2-1 buy down program to ease the high rates for a few years.
Let’s take a look at how a buy down interest rate works and if it’s a good idea for your current situation.
What is a buy down interest rate?
A buy down interest rate is a financing method where the buyer will pay a lower interest rate for the first few years of a loan in exchange for an up-front payment.
For example, a 2-1 buy-down allows the borrower to save money with lowered interest rates in the first two years of the loan.
To make this possible, the buyer or seller will pay an up-front cost at closing to make up for the difference in interest payments.
The home’s seller often will pay the required up-front fee as a concession for the buyer. The funds usually are deposited into an escrow account.
Why would a seller want to pay the up-front fee for a buy-down?
When interest rates are high, sellers struggle to find qualified buyers because home demand slows.
A buy down interest rate is mutually beneficial for both buyers and sellers because the buy down makes it much easier for both parties to achieve their desired goals.
A buy-down will make a home more affordable for a buyer and make it easier for them to qualify for a loan with a lower interest rate.
The seller, meanwhile, increases their chances of selling the home.
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What is an example of a buy-down?
The most common buy down method is the 2-1 buy-down.
In a 2-1 buy-down, your interest rate will be 2% lower than your approved rate in the first year of homeownership.
Your interest rate will be 1% lower in the second year of homeownership. Then, in the third year, it will increase to your actual, approved interest rate.
If you’re approved for a 6.5% interest rate, your interest rate will be 4.5% in the first year and 5.5% in the second year.
The difference in those percentage points can add up to thousands of dollars.
2-1 buy-down breakdown
Let’s say you’re purchasing a $400,000 home and putting down 5%. Your mortgage is approved for $380,000 at a 6.5% fixed rate over 30 years.
Year 1
In your first year, you’re going to pay $1,925 per month with a 4.5% interest rate.
Year 2
In Year 2, you will pay $2,158 per month at a 5.5% rate.
Year 3
In your third year, your approved rate of 6.5% will take over, and you’ll pay $2,402 per month.
Your savings in the first two years of the loan equals $8,625. This amount is paid by the seller at closing and deposited into escrow.
Buy-down pros and cons: Is a 2-1 buy-down a good idea for you?
For many borrowers, a 2-1 buy down option makes homeownership possible when it may not be otherwise.
A lower interest rate for two years makes qualifying for a mortgage easier for some borrowers, and the extra savings gives homeowners a financial break in the early years of their mortgage.
A 2-1 buy down option isn’t for everyone, though.
Take a look at the pros and cons to determine whether this method makes sense for your unique financial situation.
Buy-down pros
- Decreased interest rate for two years, making the home more affordable
- Possible savings of thousands of dollars over the first two years of the loan
- Potential of being a concession from the seller, meaning the buyer isn’t responsible for the cost
Buy-down cons
- Built-in interest rate increase means you need to budget accordingly
- Possibility that your monthly payment may be more than you realized or expected
- Lack of availability for every type of loan
The key to success with a buy-down interest rate is to plan accordingly.
Make sure you understand the terms of your mortgage, how much your monthly payments will increase and whether you will still be able to afford it in two years.
How does a buy-down benefit me?
The greatest benefit of a 2-1 buy-down is the extra time it affords buyers to save for the home of their dreams.
A buy-down is perfect for buyers who expect their income to rise, so they can save money in the first two years and comfortably make higher payments over time.
If you’re interested in the benefits of a 2-1 buy-down, it’s important to work with a mortgage loan officer you can trust.
How do I get a buy-down?
Not all lenders offer a 2-1 buy down option, but Compass Mortgage does.
We’re determined to continue to make homeownership accessible for borrowers, even as rates continue to rise.
Our loan officers will help you understand if you can finance your home purchase with a long-term mortgage such as a conventional, FHA or VA loan, as well as use the 2-1 buy-down interest rate option to lower your first two years of interest costs.
To get started, apply now to share your basic information about your potential home purchase and needs.
We offer a Get Committed®, which provides a fully underwritten loan commitment and locks in your interest rate before you even find the property you want to buy.
A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.
Compass Mortgage treats you like family. We promise to be your advocate and partner throughout every step, to find the most affordable loan for your home.
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