With Interest Rates Up, Is It Time to Consider a 2-1 Buydown?

One of the most popular mortgage products on the market right now is the 2-1 buydown.

Rising interest rates coupled with high home prices have created a difficult environment for buying and selling.

What's in this article?

Why are mortgage interest rates rising?
What is a 2-1 buydown?
Why would a seller agree to pay the upfront cost?
What is an example of a 2-1 buydown?
What if interest rates fall during 2023?
Apply with Compass Mortgage to access our 2-1 buydown program

The 2-1 buydown is a program that benefits both buyers and sellers and helps each party achieve their goals much faster in a tough housing market.

Let’s dig into how 2-1 buydowns work, and how you can connect with the loan experts at Compass Mortgage to take advantage of this program.

Why are mortgage interest rates rising?

Interest rates have been steadily rising since the beginning of 2022 when inflation drove up costs and the Federal Reserve began to take action to stop it.

The Fed’s efforts to curb inflation come in the form of interest rate hikes, which ultimately cool consumer demand and stabilize prices.

While Federal Reserve rate hikes don’t directly influence mortgage rates, they usually indirectly affect them due to the economic factors at play.

As a result, mortgage interest rates doubled between the start and end of 2022.

Homeownership was already becoming difficult for buyer hopefuls because of record-high home prices, and rising rates now made the situation nearly impossible for many.

In response to these challenges, mortgage lenders began to offer a product that hadn’t been widely used since the late 1970s and early 1980s: the mortgage buydown.

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What is a 2-1 buydown?

A 2-1 buydown helps make the first two years of homeownership more affordable by offering a reduced interest rate.

In the first year, the borrower’s interest rate is 2% lower than the rate approved at closing. In the second year, the interest rate is 1% lower; and in the third year, the rate increases to the initially approved rate.

The lowered rate in the first two years of homeownership can offer borrowers thousands of dollars in savings over the life of the loan.

In exchange for the lowered interest rate, the buyer or seller must pay the lender up front for the interest they would lose.

Why would a seller agree to pay the upfront cost?

In today’s market, a buyer paying the up-front fee wouldn’t make much sense when they’re already struggling to comfortably afford the current prices. 

Instead, sellers or builders are covering the fee so they don’t have to reduce their sale price.

Sellers are offering the buydown as a seller concession, which makes purchasing their home more enticing to a potential buyer.

High home prices and interest rates don’t just affect buyers; sellers also have trouble attracting buyers without lowering the price they are asking.

A 2-1 buydown is a win-win for both parties: The buyer gets a reduced interest rate for two years, and the seller can sell the home faster without having to drop their price.

What is an example of a 2-1 buydown?

Let’s take a look at a 2-1 buydown example using our mortgage payment calculator.

Imagine you want to purchase a $300,000 home with a 30-year fixed-rate mortgage.

You plan to make a 10% down payment, and your approved interest rate is 6.5%.

  1. Year 1: Your interest rate with a 2-1 buydown would be 4.5%, which is 2% lower than your approved rate. Your monthly principal and interest payment in Year 1 would be $1,354.
  2. Year 2: Your interest rate would be 5.5%, and your monthly payment would increase to $1,510.
  3. Year 3 through Year 30: Your interest rate will resume at your approved rate of 6.5%. Your monthly payment will be $1,674.

In Year 1, you would save $3,840 with your reduced buydown interest rate. In Year 2, you would save $1,968. Your total savings in the first two years equals $5,808.

The seller will pay the total savings of $5,808 at closing as the up-front, buydown fee.

What if interest rates fall during 2023?

Market experts are somewhat divided on where interest rates will land in 2023. Some analysts expect rates to remain the same or go even higher, while others anticipate a decrease by the end of the year.

Understandably, it can be hard to make a buying decision when there are so many factors at play.

The good news is that some lenders will allow borrowers to refinance during the buydown period so they can take advantage of a new, lower rate.

Even if this isn’t an option for you, you can consider refinancing at the end of your two years to access the lower rates.

The biggest consideration with a 2-1 buydown program is whether you can afford your monthly payments after the two years of lower rates have ended. 

Work with a lender you can trust to help you make the best decisions for your unique situation. 

Apply with Compass Mortgage to access our 2-1 buydown program

At Compass Mortgage, we want to make owning a home as affordable as possible.

That’s why we offer our borrowers a 2-1 buydown program to help lower the costs of homeownership in the first two years.

Program requirements include:

  • Fixed-rate purchase loan
  • Your credit score
  • Information about your income and debt-to-income ratio (DTI)
  • Down payment
  • Closing costs

In addition to a 2-1 buydown, we also offer a unique Get Committed® program, which provides a fully underwritten loan commitment that locks in your interest rate before you even find the property you want to buy.

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 ensure a loan commitment before you even make an offer on a home.

Get Committed® helps you move through the lending process faster, so you can get into your dream home with an affordable interest rate—plus the addition of 2-1 buydown savings.

Apply today with our loan specialists or contact us for help with your next steps. We think you will love our personalized, simple lending process and family atmosphere.

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