What Is A 2-1 Buydown And How Does It Work?

hey Kyle here with winthehouselylove.com as interest rates have increased a lot recently and made homes more unaffordable with their monthly payment a program has popped up that a lot of people are talking about called a 2-1 buy down so in this video I'm going to show you how a 2-1 buy down Works in detail I'm also going to give you a free 2-1 buy down calculator the link is in the description for that I'm gonna let you know if you should use it show you some pros and cons and also give you some alternatives to consider because a lot of people are kind of pushing this program so first just a really quick overview the way that this works is it basically is showing you a rate reduction in the first two years okay so for instance let's say that right now on a normal loan you would be getting a seven percent interest rate okay so this is going to be what's called our note rate now seven percent is going to start in year three through Thirty okay the way the two one buy down works is that in year one your rate is two percent lower meaning that it would be five percent in Year One in year two it's one percent lower meaning it's then going to be six percent in year two and then we get to year seven I'm sorry year three and it's now seven percent so two percentage points lower in the first year one percentage Point lower in the second year and then it's back to the normal rate from years 3 through 30. and so basically What's Happening Here is the buyer is using money from the seller or a builder to subsidize their monthly payment in hopes of refinancing before that permanently higher payment the you know seven percent interest here so basically what's happening is you're going to negotiate for the seller or the Builder to give you a credit to offset the monthly payment okay because you still have the note rate of seven percent in those first two years but what happens is the seller gives you money or the Builder gives you money to kind of buy it down to this kind of artificially lower rate or the same payment that you get at a five percent rate or a six percent rate okay I'm gonna show you a calculator here that makes this really easy to see in just a minute now really quickly there are two main uh kind of ways the interest uh rates affect loans and you see this through either an adjustable rate mortgage also called an arm or a fixed rate mortgage the way that a fixed rate mortgage is works is this is the most common it's what people are most familiar with it's when you get something like a 30-year loan and it's at one interest rate for the entire period of the loan so maybe you get seven percent interest for 30 years okay until that loan is paid off the way an adjustable rate mortgage works is that usually you have a period of time that's fixed so maybe the first five years is fixed at let's say six percent and then it might adjust every year after that based on the market okay and the way that a buy down works is it's a fixed rate loan but we're kind of simulating a little bit of an adjustable rate in a way if you want to think about it like that because it's temporary this is also called a temporary buy down so year one two percent lower year two one percent lower than year three you go to the normal rate okay so this is how it usually works you have you here buying a home you also have your buyer's agent who's representing you working with you to help you purchase this home what you do is you request a credit from the seller or the Builder through a purchase contract so you see the home that you like you say I really want to buy this home I want to buy it for let's say four hundred thousand dollars but I want to do this temporary buy down because I want my payment to be lower in the first two years because I'm anticipating refinancing in the future you're anticipating interest rates lowering before that period is up okay so the seller or builder then would agree or they could renegotiate with you but in this instance let's say they agree with you then what they'll do is they will give that money to your lender your lender is going to hold that in a separate escrow account okay they're gonna hold that money in the side and they're only going to charge you the monthly payment based on that lower interest rate for the first two years years and they're going to use the money from the escrow account to subsidize that monthly payment okay so the seller Builder is giving you money to subsidize your first two payments let me show you how this works I have a link to this calculator in the description it is free this is the two one buy down calculator calculator it's harder to say on my website here's how it works first you're going to enter your details so let's say we're buying a home let's say it's four hundred thousand dollars right here we can see the loan amount and our down payment let's say we're doing five percent down maybe this is a conventional loan so twenty thousand dollar down payment now we can take a look at our interest rate these are just examples here so let's say we're looking at seven point two five percent and if we want we can take a look at you know today's national average is around seven so actually let's do seven okay so now we can see your payment will be lower by up to 488 dollars per month really quickly none of these payments include property taxes insurance or HOA it's just the principal and interest payment so in Year One your payment would be two thousand forty dollars per month this is when it's two percent lower so effectively you're getting a five percent interest rate on this even though the loan was going to be seven you're getting five percent and year one so this is 488 dollars less per month for the First full year than your normal payment then in year two your payment is going to go up to two thousand two hundred and seventy eight dollars per month your interest rate is one percent lower bringing it to six percent and that's a reduction of 250 per month and then in year three through 30 through the rest of the loan it's going to be fixed at that seven percent and this is your normal payment two thousand five hundred and twenty dollars per month so you can see here you know if you're looking at buying a house and you see this is the 400 000 house we really want it but 2500 right now is going to be a little tough to swallow with how uh you know High interest rates are right now if you're anticipating interest rates coming down in the future which If the Fed gets inflation under control likely we'll see interest rates start coming back down um if that's the case then you can then refinance into a lower interest loan take something like the two thousand dollars per month for the first year 22 almost 2 300 for the second year and then go into this here now a lot of people ask okay what happens if I refinance before year three I'll show you that here in just a second too so this is what your payment would look like over year one two and three through Thirty so we can see how this increases we can also see how the interest rate changes as well year one it's a five percent year two it's at six years uh three through Thirty are at seven percent same thing same uh information that we saw earlier it's just put here in a table now what we can see here as well is the annual reduction as well so in the first year that's a five thousand eight hundred dollar reduction that we're not paying in monthly payments in year two that's almost three thousand dollars that we're not paying on that monthly payment total that's eight thousand eight hundred and fifty Seven dollars that's going to be put into an escrow account so we can see here we will need 857 dollars from the seller or the Builder okay and that's effectively two point two one percent of the purchase price in this calculator as well we can show these inputs if we want to change this around and maybe see how our interest rate our purchase price might affect things right we're buying a 450 000 house at a seven point two five percent rate we're going to need ten thousand dollars from the seller or the Builder now if you refinance before uh that two years is up you can actually get that money back okay so let's say um you want to refinance and let's say you know let's say interest rates drop uh let's say in 14 months so one year in two months you will have 2 800 left in that escrow account you will get that back that can go towards uh you know paying down the rate on your new mortgage if you want to or use towards closing costs so you do get this money back here okay and then we also have a monthly breakdown so again link is in the description for you to uh explore this as you are walking through this I want to see different numbers and you can talk with your realtor about these numbers show them this calculator plug in uh you know what you're looking at and this can be a strategy that you use also might be really helpful for your realtor so they don't have to you know do that math uh there okay so really basic requirements this is only for primary loans assuming you have to live in the home okay it's not an investment property it is only for purchases not for refinances it is only for fixed rate 30-year loans this is available on most common loan types like conventional FHA VA and USDA all which allow you to use their minimum down payments USDA is zero percent VA is zero percent FHA is 3.5 percent down conventional for first-time buyers is three percent down if you're not a first-time buyer or you're buying at a high cost of living area it's going to be five percent down okay usually you're going to need a 680 FICO score this is the median or the middle score that you have with your FICO usually this is going to be the requirements to get a 2-1 buy down okay also you must qualify at the note rate so let's go back to our example at seven percent if we're looking at seven percent even though in the first year our interest rate is going to be five percent in the second year it's going to be six percent and the third year is going to be seven we have to qualify based on the seven percent interest rate and that higher payment so if I go back to our calculator here right let's take a look at uh you know seven percent at four hundred thousand even though our first year as payment is going to be two thousand forty dollars we have to qualify with our debt to income ratio at twenty five hundred dollars per month and if you want to learn more about how debt to income ratios work and qualifying for a loan um you can search that on my channel as well okay now there are there are two other um options or two other alternatives to this are a little less common there's a one zero buy down in a three two one buy down and it works very similarly where the two one buy down says first year is lower by two percent second year is lower by one percent and then it's normal on the third year three two one by down works in the same way where the first year is lower by three percent second year is lower by two percent third year is lower by one percent fourth year is normal and the one oh is the first year is lowered by one percent and the second year is normal these are a lot less common three two one is a lot more expensive because we're requesting a lot more uh from the seller there and something to consider as well oh you know as you are looking at this is that when you're asking you know when you're negotiating for this keep in mind that this does change your ability to negotiate an offer right if you're going to a seller and saying I want to buy your home but I need 800 back it works in the same way that you'd be asking for a closing cost credit it's going to make your offer less attractive now as we are flipping into seeing more inventory and flipping more into more neutral territory to a buyer's market where buyers have more leverage this is more of a possibility this is why you're seeing the 2-1 buy down becoming more popular because homes are becoming more expensive monthly because of the higher interest rates but competition is uh slowly declining okay so here are some Alternatives that you can do because we're already going to ask a seller for money let's say we're asking them for 8 800 that could go to a temporary buy down with a two on buy down program we could also instead of using the temporary buy down if if you need money towards closing costs you can do that as well you can put that money towards the closing costs that you have for things like an appraisal and insurance and a title search recording fees property taxes things like that the benefit of doing this is a lot of people when they buy a home they empty their bank account to purchase that home and it's always nice to have your closing costs covered so you can retain emergency savings moving costs unexpected expenses that are going to come with you moving you could also purchase discount points so the way a discount Point works is instead of it being a temporary buy down it's a long-term buy down okay so the way that this works is you could ask your lender hey what if I paid eight thousand dollars towards my interest rate at end points that could then lower your interest rate over the 30 years total okay and so what a lot of people consider here between long-term points or something like a temporary buy down really is the break-even period And so you can use calculators that I have on my website called the loan Clarity advisor that helps show you the break-even period of paying long-term points or looking at something like a 2-1 buy down an alternative also is looking at an adjustable rate mortgage an adjustable rate mortgage is something I think you need to be very educated on before you get into it because the interest rate will adjust based on the market meaning that it can go up quite a bit higher than just a fixed rate it can also go lower but it's something to be very mindful of and be very careful of if you're looking into an arm so should you use It ultimately it's a strategy that comes out in tough affordability markets okay so keep in mind loan officers real estate agents uh sellers are all you know they want you to be able to purchase a home all for different motives the seller wants to be able to sell their home and make money usually or have the flexibility to go somewhere else the real estate agent you know and loan officers as much as they do want to help they are also in the business of you know they have a business they're trying to make money as well and so what I see happen a lot of times uh or what I've been seeing recently is these programs kind of get pushed as like this is fantastic you're going to get a you know there's no consequence to this at all and there isn't really necessarily a consequence however that money could be used in different ways if you are getting it than just a temporary buy down and of course you can get a refund if you refinance or sell you know within that period of time so it's just something to be mindful of you know people pitches like this is the best program ever and you know there are alternatives that to consider as well that could be better do not use it to stretch your affordability okay don't see the you know two thousand dollar monthly payment for the first year and be like that's perfect but all of a sudden when it comes to twenty five hundred dollars per month that's going to be tight for you also I see this sold as like you know people sell as like this is so you can ease into your mortgage payment for people whose income is going to increase in the future and I I don't know anyone I've never met anyone who's like I know my income for sure is going to increase in the future um to offset it in that way you don't know what the future of your income is going to look like also I don't know that it's a fair way to say like this is so you can ease into your mortgage payment I I don't know it feels like a little bit of garbage to me I think ultimately you should be comfortable with what your long-term payment is going to be the upfront period of savings is nice mainly as a strategy If You're Expecting interest rates to lower that's the main reason why you would use this program is if you expect interest rates lower we want to purchase those temporary buy down points to give us ourselves some padding that way when interest rates lower we can refinance into a lower rate versus those long-term points that we can't recover if we refinance or sell okay so ultimately make sure you're also getting a fair price on the home not just being sold on a monthly payment don't just look at home you know for instance we're looking at 400 000 home and say great two thousand dollars a month in principle and interest sounds fantastic but is that home actually worth four hundred thousand dollars you can talk to your real estate agent have them run CMA report a comparative market analysis to see is that home actually worth four hundred thousand dollars is it a fair price to pay for that home okay do not just be sold on the monthly cost okay and then ultimately how do you get one so again my team and I would love to help you out and walk you through this process you can either start an application to get started really quickly and take a look at quotes or you can schedule a call if you have questions up front or feel free to you give me an email if you want to learn more about how to buy a home check out this video right here

Channel: Win The House You Love

Views: 50,069

Keywords: win the house you love, kyle seagraves

Id: bnb7GPu9BMY

Length: 17min 18sec (1038 seconds)

Published: Sat Nov 05 2022