Is a Buydown Smart in Michigan?
Mortgage interest rates are twice as high as they were at the start of 2022, which has made homeownership difficult for many people.
For example, if you got a $300,000 mortgage in early 2022 at a fixed rate of 3.5%, you would be paying around $550 more per month today at a fixed 6.5% rate.
What's in this article?
To help bridge the rate gap, the loan officers at Compass Mortgage have a solution for Michigan borrowers: a 2-1 buydown program.
Qualifying borrowers can access significant savings in the first two years of homeownership with a 2-1 buydown in Michigan.
Let’s take a look at how mortgage buydowns work, and whether a 2-1 buydown is right for you.
What is a mortgage buydown?
A buydown is a method homebuyers can use to reduce their interest rate in the first few years of their mortgage in exchange for an up-front payment.
Buydowns aren’t new, but they usually only emerge during periods where borrowers need help with high mortgage rates.
Ideally, the home seller or builder will pay the up-front buydown payment as a concession for the buyer.
Buydowns are helpful for both buyers and sellers: A buyer gets a lowered interest rate in the first few years of homeownership, while the seller or builder can sell the home faster — and without the need to reduce the sales price.
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How does a 2-1 buydown work in Michigan?
A 2-1 buydown is a type of buydown where the borrower’s interest rate is lowered in the first two years of the loan, and increases in the third year to the rate that was agreed upon at closing.
In the first year, the interest rate will be 2% lower than the approved rate. In the second year, the rate will be 1% lower.
Then, in the third year through the end of the loan term, the borrower will pay the standard, approved rate.
Let’s take a look at a 2-1 buydown example for Michigan borrowers.
2-1 buydown example in Michigan
Let’s continue with the example we used earlier. Imagine you get approved for a $300,000 fixed-rate loan at 6.5% for 30 years.
With a 2-1 buydown, your rate will drop to 4.5% in the first year of the loan, and 5.5% in the second year.
In the third year, it will resume at 6.5%.
In the first year, you will pay $1,520, which is $376 less per month than you would pay with your approved rate.
In the second year, you will pay $1,703, which is $193 less per month than your standard rate.
In the third year, your monthly payment will be $1,896. Your total savings in the first two years of homeownership is $6,828.
The $6,828 is due at closing, and usually is deposited into an escrow account the lender can pull from to cover interest payments in the first two years.
What is the advantage to using a buydown in Michigan?
Michigan is considered an affordable place to live, often falling in or just outside of the top 10 most affordable states in the U.S.
The state has numerous job opportunities and a healthy economy, while residents enjoy a lower cost of living.
Cold weather and the city of Detroit often come to mind when out-of-towners consider the state, but the Pure Michigan campaign has done wonders for boosting the state’s appeal and highlighting its natural beauty.
Residents can enjoy all four seasons and an abundance of recreational activities, thanks to the Great Lakes and a unique Upper Peninsula.
The median home sale price stands at $225,900, according to Redfin, which means homebuyers may be able to afford an even larger or more expensive home by taking advantage of Compass Mortgage’s 2-1 buydown program.
How much does it cost to buy down an interest rate?
In the 2-1 buydown example above, the buyer, seller or builder would be responsible for paying $6,828 at closing.
The up-front payment covers the difference in interest payments for the lender. The payment is known as discount points, or points.
The buyer also would be responsible for paying the closing costs and fees associated with the loan, the down payment and mortgage insurance, depending on the loan type.
Some loans, including VA loans, may not require a down payment or mortgage insurance.
The most important consideration with a 2-1 buydown is that your monthly mortgage payments will increase in the third year. Make sure you have a plan for how to comfortably afford this increase.
Who can get a buydown in Michigan?
As with any loan type, there are certain lender requirements borrowers must meet to qualify for a 2-1 buydown in Michigan.
You can use a 2-1 buydown with most purchase loans, including conventional, FHA and VA loans, but you cannot refinance a mortgage.
Your mortgage also must have a fixed interest rate. Buydowns do not apply to adjustable-rate mortgages (ARM).
Take a look at the following requirements for a 2-1 buydown:
- Qualifying credit score
- Verifiable, ongoing income
- Lack of excess debt, as measured by applicant’s debt-to-income ratio (or DTI)
- Minimum down payment (depending on loan type)
- Closing costs
- Mortgage insurance (depending on loan type and amount of down payment)
Work closely with a Compass Mortgage loan officer to determine your specific loan options.
Is a 2-1 buydown a good idea for you?
If you’re looking to move to Michigan, a 2-1 buydown can offer you notable savings in the first two years of homeownership.
You can use the savings for home improvements or maintenance, or simply as a cushion for future payments and expenses.
A 2-1 buydown also can help you qualify for a larger home in Michigan than you might have been able to afford otherwise.
Compass Mortgage offers 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.Apply today or contact us for assistance. We look forward to helping you find your dream home in Michigan with our simple, personalized loan process!