Interest rates are rising and home prices are still high, which means many potential homebuyers feel stuck.

Fortunately for these homebuyers, there’s another solution: a buydown.

If you’re living in Illinois or looking to move to the state, you can potentially use a 2-1 buydown to lower your interest rate for the first two years of homeownership.

What is a mortgage buydown?

A mortgage buydown occurs when a buyer or seller pays an up-front fee for a lower interest rate.

For example, a 2-1 buydown gives a borrower two years of lower rates, making the first two years of homeownership more affordable.

In the first year, the borrower will pay a rate that’s 2% lower than their approved rate. In the second year, they will pay a rate that’s 1% lower.

Then, in the third year, they will begin to pay their standard rate that was agreed upon at closing.

How are buydowns structured?

The home seller will pay the up-front buydown fee as an incentive for buyers. During periods of higher rates and home prices, selling a home can become increasingly difficult.

The buydown method is an incentive for buyers to gain significant savings not only in the first two years but over the life of the loan.

Meanwhile, the seller can sell the home more quickly. 

Let’s take a look at how a buydown is structured.

2-1 buydown example

If you get a mortgage loan for $350,000 at a 6.5% interest rate, in the first year of homeownership, your rate will be 4.5%.

In the second year, it will be 5.5%, and in the third year, it will increase to 6.5%.

Your monthly payment at a 6.5%, 30-year fixed interest rate would be $2,212.

But with a 2-1 buydown, in your first year, you would only pay $1,773 per month at a 4.5% rate for savings of $439 per month.

In your second year, you would pay $1,987 at a 5.5% rate for a savings of $225 per month.

Overall, you would be saving $7,968 in your first two years of homeownership.

How does a buydown work in Illinois?

Whether you live in Illinois or are considering a move, you’re most likely aware of numerous benefits and opportunities for residents of the state.

Illinois is recognized for its strong economy, job opportunities, rich history and the availability of big city life along with the “small town” feel.

Illinois has no shortage of industries, presenting its residents a higher standard of living along with numerous options for personal and professional growth.

As long as you’re working with a reputable mortgage lender who offers a buydown option to Illinois borrowers, you may be able to get a buydown for your new home.

Compass Mortgage serves Illinois borrowers who are seeking alternative financing solutions such as a buydown.

In the current economy, it has become increasingly difficult for potential homebuyers to find an affordable solution. 

Through a buydown, Compass Mortgage is proud to offer such a solution for borrowers who can afford a home but would benefit from a cost-saving option in the early years of homeownership.

What is the advantage to a buyer using a buydown?

As with any loan option, a buydown has its pros and cons.

The largest benefit to a buydown is that your payments will be lower in the first two years of homeownership.

Buydown borrowers also may be able to afford a more expensive home with the cost savings they will have in the first two years.

The most important consideration for a buydown is what you will pay once the buydown period has ended.

Be sure to factor in these costs to decide whether a buydown is right for you.

How much does it cost to buy down an interest rate in Illinois?

If you’re interested in taking advantage of a 2-1 buydown option in Illinois with Compass Mortgage, your up-front buydown cost depends on the loan amount and the approved interest rate.

In the example above, the up-front payment would be $7,968 plus your closing costs and fees.

With the seller covering the up-front buydown fee, you will only be responsible for your loan closing costs and fees, as long as the seller is not also covering any of these costs.

If you choose to sell your home or refinance before year 3, you will be prorated the amount “not spent” in the buydown. This amount will go toward the principal.

Who can get a buydown in Illinois?

To take advantage of a buydown program, the borrower must meet certain lender requirements.

To get started with Compass Mortgage, you’ll share basic information about your potential home purchase and needs. 

We’ll work with you to access your credit report and discuss your financial situation to find the best loan option.

Common 2-1 buydown requirements include:

• Qualifying credit score
• Verifiable, ongoing income
• Lack of excess debt, as measured by applicant’s debt-to-income ratio (or DTI)
• Fixed interest rate loan
• Minimum down payment (depending on loan type)
• Closing costs
• Mortgage insurance (depending on loan type and amount of down payment)

You can use a buydown for most purchase loans, including conventional loans, FHA loans and VA loans.

You can discuss the full range of loan options one-on-one with a Compass Mortgage loan officer.

Is a 2-1 buydown a good idea in Illinois?

A 2-1 buydown in Illinois is a great solution for many borrowers struggling with high interest rates and ever increasing home prices.

If you’re wondering whether you should buy down your interest rate on your next home, apply now for a loan with Compass Mortgage.

We offer our borrowers Get Committed®, a unique program 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.

Get started with Compass Mortgage today and experience our simple, personalized loan process. Together, we’ll find the most affordable loan for your home.

Photo by Curtis Adams