Understanding Mortgage Rate Buy Downs
The 2-1 and 3-2-1 buy down terms have been popping up all over since interest rates increased last year. It is a great strategy allowing the new home owners to ease into a higher monthly payment.
The sellers of the home provide funds to the buyer to be able to lower their housing payments during the first few years of their new mortgage. The rate can be bought down for one year which is a 1-0 buy down. The rate can also be bought down for 24 months where the payments are 2% lower in the first 12 month and 1% lower during the months 13-24.
Most home loans allow the sellers to help with the buyers’ closing costs. The buy downs are considered closing costs.
With a 2/1 Buy Down; with a full interest of 5.99%, the first 12 months would be calculated at 3.99%. The 13th through the 24th payment is calculated at 4.99%. Then starting with the 25th payment the interest is calculated using 5.99%.
Based on a loan amount of $200,000 with a term of 30 years:
3.99% $7,980 / 12 = $665.00 $953.68 principal and interest
4.99% $9,980 / 12 = $831.67 $1072.52 principal and interest
5.99% $11,980 / 12 = $998.34 $1197.82 principal and interest
The buy down cost is calculated by adding up the differences in payments:
$244.14 X 12 = $2929.68
$125.40 X 12 = $1504.80
In this scenario, the buy down equals $4,434.48; 2.22% of the purchase price. This leaves more room for help with other closing costs.
Buyers in this example start with a payment of $953.68 vs. $1197.82 for the first 12 months. Then during the second year the payment is $1072.42 vs. $1197.82. Then with payment #25 the full interest rate is charged. The payment is $1197.82 for the remainder of the term.
This strategy is a great way for buyers to ease into the full payments. Plus, if interest rates creep back down to lower levels the buyer can choose to refinance at the end of two years or sooner. The added benefit would be the homeowners’ equity in their home would have appreciated.
Using this tool can help facilitate more closings. Call me if you would like more information and clarification.
Provided by: JoAnn Moore, The Mortgage Market of Delaware, LLC. P O Box 204 Georgetown, DE 19947. NMLS# 165477. 302.855.1306, 302.236.1229, MMODJoAnn@aol.com Licensed Mortgage Originator.