Is a Buydown Smart in Florida?
Are you considering a move to Florida in 2023 but wondering how to comfortably afford your monthly mortgage payments?
The past few years have been difficult for homebuyers, and even though predictions look bright for a more balanced market, it will take some time to get there.
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In the meantime, lenders such as Compass Mortgage are offering borrowers a helpful solution: a mortgage buydown option.
With a mortgage buydown, borrowers can access significant savings in the first few years of homeownership in exchange for an up-front payment.
Let’s take a look at how buydowns work in Florida, and whether this option is right for you.
How does a mortgage buydown work in Florida?
Mortgage buydowns offer borrowers a lower interest rate for the first few years of the loan in exchange for an up-front payment.
A 2-1 buydown is one the most common types of buydowns.
It works like this: In the first year of homeownership, you will pay an interest rate that is 2% lower than your lender-approved rate. In the second year, you will pay a rate that is 1% lower.
Then, in the third year, your initial approved rate will resume.
Mortgage buydowns can provide crucial savings over the life of the loan.
However, someone must be responsible for paying the lender the interest that they will not be receiving over the next two years.
Ideally, the seller or contractor will cover the up-front fee. Otherwise, it may not make sense for the buyer to use a 2-1 buydown and pay the up-front fee on their own.
Let’s take a look at a 2-1 buydown example on a potential Florida property.
2-1 buydown example
Imagine that you find your dream home in Florida for $480,000. You put down 10%, or $48,000, and are approved for a $432,000 mortgage at a 6.5% fixed rate over 30 years.
The seller is offering to pay the up-front fee for a 2-1 buydown as a concession to you, the buyer.
In your first year of the buydown, your interest rate will be 2% lower than your approved 6.5% rate, so, 4.5%.
In the second year, it will be 1% lower, at 5.5%.
It’ll pan out like this:
- In Year 1, your monthly mortgage payment at 4.5% will be $2,189
- In Year 2, your monthly mortgage payment at 5.5% will be $2,453
- In Year 3, your approved 6.5% rate resumes, and your monthly payment will be $2,731
In Year 1, you would save $6,504 with your reduced interest rate.
And in Year 2, you would save $3,336, for a total savings of $9,840 in the first two years of the loan.
This $9,840 is your up-front payment due at closing. In this case, the seller will pay the up-front fee.
The fee is often paid into an escrow account that the lender will draw from to cover the interest costs in the first two years of the buydown.
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What are the pros and cons of a buydown in Florida?
People who move to Florida often are hoping to take advantage of its warm climate and bustling economy. Florida is home to numerous industries, including manufacturing, aviation and tourism.
Of course, Florida also is rich in culture and vacation options.
According to Zillow, the typical home value in Florida is currently $406,426.
Florida’s home prices are not as high as those in California, Hawaii or even Massachusetts, but they’re also not as low as Indiana or West Virginia.
The state falls somewhere in the middle of many national rankings when it comes to home prices and overall cost of living, which is why it has become a popular place to move to in recent years.
This is also why Florida is the perfect state to take advantage of a 2-1 buydown. A buydown from Compass Mortgage can make homeownership even more affordable in the Sunshine State.
As with any loan option, a 2-1 buydown in Florida has its pros and cons.
While it can offer borrowers notable savings in the first few years of homeownership, borrowers must be prepared for the increased monthly payments once your initial approved rate resumes in Year 3.
Work closely with your loan officer to determine your full range of loan options, and decide whether a buydown is right for you.
How much does it cost to buy down an interest rate?
The cost of a 2-1 buydown depends on your approved interest rate and your loan amount.
Your lender will help you calculate your costs based on these factors, and this amount must be paid at closing by you, the seller or in some instances the contractor.
In the example above, the up-front payment is $9,840. This amount is due at closing, as well as the typical closing costs and fees associated with a mortgage.
Closing costs generally equal about 2% to 6% of the loan amount.
If you choose to sell your home or refinance before year three when your approved interest rate resumes, you will be prorated the amount “not spent” in the buydown. This amount will go toward the principal.
Who can use a buydown in Florida?
To determine whether you can use a 2-1 buydown in Florida, you’ll need to connect with a loan officer who offers this option.
Compass Mortgage is proud to offer Florida borrowers a 2-1 buydown option to make homeownership more affordable.
To qualify for a 2-1 buydown with Compass Mortgage, you will need to take the following steps:
- Share information with us about your potential home purchase and needs
- Work with us as we pull your credit report
- Provide income documentation for us to determine your ongoing income and debt-to-income ratio (DTI)
- Learn about the buydown process and your loan options to see if you meet the requirements
- Pay your up-front fee, down payment, closing costs and mortgage insurance (depending on your loan type)
You can use a buydown for most purchase loans, including conventional loans, FHA loans and VA loans. Your loan will need to have a fixed interest rate.
Is a 2-1 buydown a good idea for you?
A 2-1 buydown is a helpful tool for both buyers and sellers.
Buyers can save money in the first few years of homeownership and may be able to afford a larger home than they could have without a buydown.
Sellers and builders can sell homes faster and maintain the initial list price.
If you’re looking for a 2-1 buydown in Florida, apply with Compass Mortgage today to get started and learn about your loan options.
Compass Mortgage can offer even more to borrowers than a 2-1 buydown: We have a program called Get Committed®, which provides a fully underwritten loan commitment that locks in your interest rate before you even find the property you want to buy.
Merely having a standard pre-approval does not mean that you have secured a loan.
But with Compass Mortgage’s distinctive Get Committed® program, you can go through most of the steps in the loan process to ensure a loan commitment before you even make an offer on a home.Connect with a loan officer now to get started with our simple, personalized loan process!