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Worried About Rising Interest Rates?

As interest rates rise, buyers may be concerned about being able to afford monthly payments to buy a home. Higher interest rates impact the number of buyers who can qualify for homes in every price range. Due to the smaller pool of buyers, sellers are concerned about fewer showings and fewer offers.

Mortgage lenders are seeing a rise in borrowers who are looking for opportunities to reduce their initial mortgage payments. One solution that benefits both buyers and sellers is called a 2-1 buydown. It  benefits buyers by helping them afford the payments and it benefits sellers who are looking to appeal to more buyers by paying for a buydown as a seller concession. While rate buydowns aren’t new, it’s a financial tool that often gains popularity during periods of rising rates like we’ve seen in recent months. 

2-1 buydowns are especially appealing to first-time buyers who may be watching mortgage rates rise over the last few months and wondering how they can achieve becoming a homeowner in the current market. 

What is a 2-1 Buydown? 

Broken down, a buydown is a financing tool that allows the borrower to reduce the payment for the first couple years of their new mortgage. This agreement provides a lower interest rate for the first year of the loan, then in year two, it raises slightly and reaches the full rate by year three and beyond. 

For example, if a new buyer is looking to purchase a home for $394,900 with 5% down payment, that’s a loan amount of $375,150. Let’s also use a current mortgage rate of 6.5% for our example. 

With the buydown, the interest rate would be 4.5% in the first year, followed by 5.5% in the second year. In the third year, the rate would resume to the original note rate of 6.5% and remain at that rate for the remaining length of the loan, or until the buyer refinances at a different rate. 

Who Benefits From a 2-1 Buydown 

A 2-1 Buydown could be especially helpful for first-time buyers who are looking to lock in the benefits of homeownership sooner rather than later. With this financing option, buyers have their first 12 mortgage payments locked in at a significantly lower rate, plus a second year of payments with a lower rate before the rate resumes to the initial amount. For buyers who prioritize timing, a 2-1 buydown empowers borrowers to choose this option to optimize their buying timeline for their unique circumstances. Additionally, a 2-1 buydown is worth considering for buyers who expect their income to rise during the two years of lower mortgage rates, making it more accessible to increase their income before paying the higher monthly rate.

That said, buyers aren’t the only ones who benefit from a 2-1 buydown. Sellers who are looking to complete the sale of their home quickly and efficiently can appeal to more buyers with this option, and can benefit from the convenience of buying down the rate in lieu of paying closing costs. This option helps immensely for sellers who are looking to avoid challenges and minimize hassles as they find their path forward. 

Find Your Path Forward with Confidence

Buyers who want to win in this market need to know that who they choose for financing is just as important as choosing the best financing tools to help them find their path forward. Reach out to start a conversation with one of our strategic guides. Our team can connect you with trusted lenders to help you gain pre-approval before moving forward with your search plan. 

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