With the interest rates increasing, it’s important to find ways for buyers to continue to buy properties and have payments they can afford. A “Buydown” is a great way to do that.
Buydowns come in the form of 3-2-1, 2-1 and one-year buydowns.
How it works: funds from the seller pre-pay the buyer’s payment for 1, 2 or 3 years. For example, on a 2-1 Buydown, the interest rate is 2% lower than market in the first year, 1% lower the second year and market the third year.
Let’s assume a home is being sold for $300,000 and the buyer is putting 5% down. To attract more buyers, the seller has agreed to pay $6,100 toward a 2-1 Buydown. If the current market rate is 5.5% then the buyer’s payment for the first 12 months would be at 3.5% or $1,279/month. For the second year, the payment would be based on a rate of 4.5% or $1,444/month. Starting in the third year, the buyer’s payment would be at 5.5% for the remaining 28 years or $1,618/month.
The cost is calculated by taking the difference between payments in year one and your 3×12 plus the difference between payments in the year two and year 3×12. In our example above the total cost would be $6,100. The monthly reduction in payment for the first year would be $339 and the $174 during the entire second year.
This may be a much more attractive option for a buyer than going into some sort of an adjustable rate (ARM) product that has more risk with it. Remember, an ARM will eventually adjust to the market rate and there is no guarantee that rates will be lower when that ARM starts to adjust.
The Buydown uses current market rates but allows the buyer to buy a home at a more affordable price with the risk of the ARM. Additionally, this a great way for buyers who are likely to make more money as they continue their career to ease into the payment.
But what is in this for the seller. Why would they do this? The answer is that the seller May be willing to concede $6,000 more readily than dropping their sale price by $10,000 or $15,000 when their house is not selling. Additionally, by offering this option to buyers they may get more interest from more buyers creating more competition.
We used to do 2-1 Buydowns years ago when rates were higher. But for the last several years with rates at all-time lows, they were forgotten. Now that rates are creeping up again, it may be good time to blow the dust off this product and help more buyers realize their dreams.
If you have questions about 2-1 Buydowns, give us a call! We’re happy to help in any way we can.