Is a Buydown Smart in Iowa?
Mortgage buydowns offer a way for buyers to save money during the first few years of homeownership.
If you’re seeking a buydown option in Iowa, you’re in luck: Lenders such as Compass Mortgage are offering a 2-1 buydown program to help borrowers afford the home of their dreams.
What's in this article?
Let’s take a look at how a mortgage buydown works in Iowa, how they are structured and how much it costs to help you determine whether a buydown is the right option for you.
What is a mortgage buydown?
A mortgage buydown option allows a buyer or seller to pay an up-front fee at closing in exchange for a lower interest rate.
A 2-1 buydown is a type of buydown that offers two years of lowered rates.
In the first year of homeownership, your interest rate will be 2% lower than your approved rate. In the second year, your interest rate will be 1% lower.
Once the first two years are up, you will resume payments at your initial rate that was finalized at closing.
Of course, a 2-1 buydown wouldn’t be much of an incentive for buyers if they were to pay the up-front fee themselves. Instead, sellers or contractors will often cover the fee as a concession.
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How are 2-1 buydowns structured?
A 2-1 buydown is beneficial for both buyers and sellers.
Properties become increasingly difficult to buy and sell during periods of high interest rates and prices.
Buydown options offer buyers significant savings over the life of the loan, while sellers are able to sell the home more quickly.
Let’s take a look at a 2-1 buydown example to show you the savings you can access in the first two years of your home loan.
2-1 buydown example for Iowa borrowers
Let’s say you get approved for a $400,000 mortgage loan at a 7% fixed interest rate for 30 years.
With a 2-1 buydown, your first-year rate will be 5%, and your second-year rate will be 6%.
In the first year, you will pay $2,147 per month at your 5% rate.
In the second year, you will pay $2,398 per month at your 6% rate.
In the third year, your 7% rate will resume and you will pay $2,661 per month.
Let’s break down the total savings amount over the first two years. This amount is required at closing, and will be deposited into an escrow account.
In your first year, you will save $514 per month, for a total of $6,168 in the first year.
In your second year, you will save $263 per month, for a total of $3,156 in the second year.
Overall, you will save $9,324 in the first two years of your home purchase.
How does a buydown work in Iowa?
Iowa is a popular state to live and work because it is peaceful and affordable yet still offers plentiful job opportunities.
According to Redfin, the median home sale price in Iowa is $198,700, which currently is much lower than the national average.
The state also has a lower crime rate, and experiences all four seasons.
Iowa manages to be less populous while maintaining a robust economy, which means you can expect less traffic jams and pollution while enjoying a fulfilling career.
Iowa also is a beautiful state, with rolling hills, ancient bluffs, unique caves and scenic views of the Mississippi River.
The affordability of the state combined with a 2-1 buydown can offer buyers significant savings on a larger home.
Compass Mortgage is proud to serve Iowa borrowers who are seeking a buydown option for their home purchase.
What are the pros and cons to using a buydown in Iowa?
Every loan option has its pros and cons, depending on the buyer’s personal and financial situation.
The biggest pro to using a buydown is the savings you can access in the first two years of the loan. This may also allow you to afford a larger home than you may otherwise be able to purchase.
On the other hand, you will have to weigh whether you can afford your loan once the two years of savings end.
When your interest rate rises to 7% after two years, can you afford the $2,661 monthly payment?
Work closely with your Compass Mortgage loan officer to determine whether a 2-1 buydown option is right for your Iowa home purchase.
How much does it cost to buy down an interest rate in Iowa?
If you choose a 2-1 buydown option to purchase your home, your up-front payment amount due at closing will depend on two factors:
- Your loan amount
- Your interest rate
In the example above, a $400,000 loan amount and 7% interest rate results in a $9,324 savings in the first two years of the loan.
The $9,324 must be paid at closing along with your other closing costs and fees.
If the seller or contractor is offering a 2-1 buydown as a concession, they will pay this fee for you, and you will be left to pay the closing costs and fees as usual.
Closing costs typically are between 2% to 6% of the loan price.
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 get a buydown in Iowa?
As with any loan option, borrowers will have to meet certain lender requirements to qualify for a 2-1 buydown.
Common 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.
Is a 2-1 buydown a good idea for you?
To determine whether you qualify for a 2-1 buydown in Iowa, get started with Compass Mortgage today to explore your full range of loan options.
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.Connect with a loan officer today to find the most affordable loan for your home.