HERE'S A GREAT NEGOTIATING STRATEGY FOR A CHANGING MARKET
1. What is a 2-1 Buydown?
A "2-1 Buydown" is where you or the seller pay a fee at the closing to reduce the interest rate on your mortgage by 2% in year 1 and 1% in year 2. This results in temporarily lowering your monthly payment and potentially making the home more affordable for you.
A "3-2-1 Buydown" can sometimes also be used, although a 2-1 Buydown is more common. A 3-2-1 buydown is where you or the seller pay a fee at the closing to reduce the interest rate on your mortgage by 3% in year 1, 2% in year 2, and 1% in year 3.
2. What are the benefits of a 2-1 buydown?
A 2-1 Buydown reduces your interest rate and monthly payment during the first few years of homeownership, making the home more affordable for you. It can also allow you to benefit from owning a home now so you can start to build equity vs. waiting a few more years and continuing to rent. If the seller pays for the 2-1 Buydown, it would have a much greater impact on your monthly payment than asking the seller to reduce the list price of the home. This could be a great negotiating tool because a greater percentage of homes listed for sale in today's market are seeing price reductions.
One way to get maximum benefit with a 2-1 Buydown is to use it on a 5-year or 7-year intermediate term ARM (adjustable rate mortgage). The interest rate on those types of loans is often lower than the interest rate on a fixed-rate loan, resulting in an even lower monthly payment.
3. What happens when the interest rate goes back to normal?
In year 3 of a 2-1 Buydown, your interest rate would adjust to its normal "note rate." If market interest rates are the same or higher than they are today, you would just keep the loan and pay the normal payment. However, if a recession happens, as is being predicted by many economists, market rates may come down again. In that case, you may be able to refinance at the then-current rates. Keep in mind that interest rates are cyclical. They tend to go up when the economy is doing well, and they tend to go down when the economy is doing poorly.
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