Tennessee has a fairly low cost of living but unfortunately is experiencing the same high home prices as most other states in the U.S.
To help borrowers combat these high prices and rising interest rates, mortgage lenders are offering loan programs to help make home ownership more affordable.
What's in this article?
Compass Mortgage is offering a 2-1 buydown program to Tennessee borrowers which gives qualifying buyers significant savings in the first few years of homeownership.
Read on to learn more about mortgage buydowns and how you can get a 2-1 buydown for your Tennessee dream home.
What is a mortgage buydown?
A mortgage buydown lowers a borrower’s monthly payments during the first few years of homeownership in exchange for an up-front payment.
Buydowns work by dropping the interest rate on the loan for the first one or two years, depending on the type of buydown.
To cover the difference from the lower interest payments, the seller will pay an up-front cost at closing as mortgage points or as a lump sum deposited into an escrow account.
Buydowns are not new, but there is less of a need for them when interest rates are low. Typically, lenders will offer these programs when interest rates start affecting a borrower’s ability to qualify for a loan.
The U.S. is currently experiencing the highest interest rates it has seen since the early 2000s. As a result, lenders are working hard to make homeownership more affordable by offering buydown programs.
Compass Mortgage offers a 2-1 buydown program for qualifying Tennessee borrowers.
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How are buydowns structured in Tennessee?
Buydowns are most advantageous when the seller or contractor is offering them as a concession.
A seller concession makes the deal beneficial for both the buyer and the seller. The seller can sell the home more quickly, and the buyer can more easily afford the home.
At closing, the seller or contractor will pay the up-front fee, and the buyer will receive a lower interest rate for the first few years.
How does a 2-1 buydown work?
A 2-1 buydown means a borrower’s approved interest rate is 2% lower in the first year of homeownership, and 1% lower in the second year. In the third year, the approved interest rate takes effect.
For example, if the borrower’s approved rate is 6%, their first-year rate would be 4%, and the second-year rate would be 5%.
Let’s say you want to buy a $300,000 home in Tennessee. You make a 5% down payment, or $15,000, and get approved for a $285,000 mortgage.
Your approved rate is 6% over 30 years.
With a 2-1 buydown, you would have a 4% rate in the first year and pay $1,361 per month.
In the second year, at a 5% rate, your payment will be $1,530. In the third year, your 6% rate will apply with a payment of $1,709 per month.
Based on this example, you would save $6,324 in the first two years with a 2-1 buydown program.
The $6,324 will be paid up-front at closing.
What is the advantage to a buyer using a buydown in Tennessee?
The greatest advantage of a 2-1 buydown in Tennessee is the cost savings in the first two years of homeownership.
Additionally, some borrowers may be able to qualify for a larger home purchase as a result of those savings.
As with any mortgage program, there are pros and cons of buying down your interest rate.
The most important consideration for borrowers determining whether a buydown is right for them is the monthly payment increases each year.
As long as buyers are prepared for the payment increases, a buydown can be a helpful tool for purchasing a home.
Living in Tennessee: How much does it cost to “buy down” an interest rate?
Tennessee is a beautiful state rich in history, music and beautiful landscapes.
While you can generally expect more expensive real estate near the big cities, there are plenty of more affordable areas to settle down.
Additionally, a 2-1 buydown can make even the more expensive homes affordable for families, which can widen your options in the “Volunteer State.”
According to Zillow, the typical home value in Tennessee is currently $309,740. Keep in mind that the averages may be lower or higher, depending on the area in which you look to move.
In our 2-1 buydown example above, we used a $300,000 home which gave the borrower a savings of $6,324 in the first two years of homeownership.
If you purchased a typical home in Tennessee using a 2-1 buydown program, you could expect a similar amount of savings—or more—in the first two years of your mortgage.
At closing, the seller will pay the up-front $6,324, and you will be responsible for paying your down payment and closing costs.
Who can buy down a mortgage in Tennessee?
Compass Mortgage offers a 2-1 buydown program to qualifying Tennessee borrowers.
To qualify for this program, you will need to meet the following general requirements:
- Get a fixed-rate purchase mortgage such as a conventional or FHA loan (program does not apply to refinance loans)
- Meet income, credit score and debt-to-income ratio (DTI) requirements based on loan type
- Meet down payment requirements (determined by loan type)
- Cover closing costs and fees
- Cover the up-front cost of buydown (if seller or contractor is not offering to pay it as a concession)
The Compass Mortgage team will work with you to help you understand if you can finance your home purchase with a long-term mortgage and use our buydown option to lower your first two years of interest costs.
Is a 2-1 buydown a good idea in Tennessee?
A 2-1 buydown can help make homeownership more affordable for Tennessee borrowers.
As long as you meet the requirements and qualify for a long-term loan option with Compass Mortgage, you can take advantage of our 2-1 buydown program for your home purchase.
We also offer our borrowers Get Committed®, a program which provides a fully underwritten loan commitment that locks in your interest rate even before you find the property you want to buy.
Having a standard pre-approval does not mean that you have secured a loan. With Compass Mortgage’s distinctive Get Committed® program, you can go through most of the steps in the loan process to secure a loan commitment before you even make an offer on a home.
Reach out to our team today to talk to a loan officer and start the application process now.
We look forward to helping you find your dream home in Tennessee!
Photo by Mikhail Nilov