As a buyer and seller there are several options one can do to either purchase the property you want or in the seller’s case, get your property sold. One of those options is doing a buydown. Just what is that? Below is an explanation from one of my lenders.
2-1 Buydown Explained
A 2-1 Buydown is a financing strategy that temporarily lowers the interest rate on a mortgage for the first two years before adjusting to the full note rate for the remainder of the loan term. The seller (or sometimes the lender or builder) funds the cost of the buydown, effectively subsidizing the borrower’s lower payments during the introductory period.
How a 2-1 Buydown Works with a 7% Note Rate:
• Year 1: The interest rate is 5% (2% below the note rate).
• Year 2: The interest rate is 6% (1% below the note rate).
• Year 3 and beyond: The interest rate returns to the full 7%.
Cost of the 2-1 Buydown (Seller-Paid)
The cost is determined by calculating the difference in monthly payments for the first two years compared to what the borrower would have paid at the full 7% rate. This cost is typically expressed as a percentage of the loan amount (points).
Approximate Cost Calculation
For a general estimate, the cost is roughly 2.25% – 2.5% of the loan amount in percentage points.
Breakdown of Approximate Cost
1. Year 1 Savings:
• Borrower pays at 5% instead of 7%.
• The monthly payment difference is covered by the seller.
2. Year 2 Savings:
• Borrower pays at 6% instead of 7%.
• The monthly payment difference is covered by the seller.
3. Total Cost to Seller:
• The sum of the first two years’ savings is typically around 2.25% – 2.5% of the loan amount.
Example Calculation (for a $300,000 loan)
• At 7%: The monthly principal & interest (P&I) payment = $1,996
• At 6% (Year 2): P&I payment = $1,799 → Monthly savings = $197 × 12 = $2,364
• At 5% (Year 1): P&I payment = $1,610 → Monthly savings = $386 × 12 = $4,632
• Total savings (cost to the seller): $6,996
• As a percentage of the loan: $6,996 ÷ $300,000 ≈ 2.33% (or 2.33 points)
I hope this helps you understand this a bit better. If you or anyone you know is looking at buying or selling, give me a call. I am here to help.
Mary Cockburn
505-639-2090
MaryCockburn.Realtor@gmail.com
Realty One of New Mexico
8500 Menaul Blvd, Ste A-240
Albuquerque, NM 87112
