A Powerful Path to Homeownership: Combating High-Interest Rates With a 2-1 Buy Down

In today’s real estate market, first-time homebuyers are facing an uphill battle due to soaring interest rates. While the dream of homeownership remains alive and well, the financial hurdles seem daunting. However, there is a valuable tool that can help mitigate these challenges: the 2-1 buy down. In this blog post, we will explore the current challenges facing first-time homebuyers with high interest rates and delve into the powerful advantages of using a 2-1 buy down to mitigate these challenges.

Understanding the Current Challenges:
It’s hard to keep perspective when coming off the pandemic era days, where if you were paying attention to the real estate market, we saw the lowest interest rates for a mortgage in history coming in in 2020 and 2021. Rates plummeted in response to the Coronavirus, and By July 2020, the 30-year fixed rate fell below 3% for the first time. And it kept falling to a new record low of just 2.65% in January 2021. In March of 2022 the Federal Open Market Committee enacted the first of the interest rate increases, and it’s been continuing to increase from there in an effort to combat inflation.

With the real estate landscape evolving as much as it has in recent times, one of the biggest & significant difficulties for first-time homebuyers is this surge in interest rates. Rising interest rates mean that mortgage payments are higher, potentially limiting the purchasing power of prospective homeowners. Let’s explore how this hurdle can be addressed effectively through the 2-1 buy down strategy.

The 2-1 Buy Down Explained:
A 2-1 buy down is a financing strategy that empowers buyers to secure a more affordable initial interest rate on their mortgage. It works by having the seller offer a concession to help buy down the rate in lieu of a more costly price reduction on the property itself. Here’s how it typically works:

1. Initial Interest Rate: The buyer starts with an initial interest rate often referred to as the “start rate.”
2. Concession from Seller: The seller contributes funds towards “buying down” the interest rate as a way to attract a buyer. This can be done in various ways, such as paying discount points or providing a lump sum towards the closing costs.
3. Lower Payments for the Buyer: As a result of the seller’s concession, the buyer enjoys a lower monthly mortgage payment for the initial years of homeownership. The mortgage gets its name from the fact that the interest rate is 2% lower in the first year, 1% lower in the second year, before eventually going back to the original interest rate at year three.

Buy Down Calculators can be found online, and by inputting information like the type of buy down, the length of the mortgage, the total loan amount, and the interest rate, the calculator can estimate your mortgage payment for the first and second years as well as the monthly payment that you’ll pay for the remainder of the mortgage.

Example: A seller has a house that’s been sitting on the market, and they’re entertaining the idea of a $20,000 price reduction to entice prospective buyers. On an average home, with average taxes, let’s say @ $500,000… If the price were decreased by $20,000 (which is a lot of money) to a sales price of $480,000, the seller is out the 20k, and the buyer only really saves about $130 a month in payments.

By utilizing a 2-1 buy down instead in this same scenario, the seller could keep the $500,000 sales price, but rather than be out the 20k, the buy down would cost $12k (keeping $8k in their pocket). If the starting interest rate was say 7.5%, then the first year at discount would be 5.5%, and the second year would be 6.5%. By this metric, the buyer would see a savings of $657 per month for year one, followed by a savings of $336 per month for year two. Year three it would return to the 7.5%, but by then economists are predicting that rates will have stabilized, and hopefully trending back down. Many lenders are offering refinancing deals & options once this happens too!

Conclusion:
High interest rates may pose challenges for first-time homebuyers, but the 2-1 buy down strategy offers a powerful solution. By leveraging seller concessions to secure a more affordable initial interest rate, buyers can achieve immediate affordability, stability, and increased buying power. This innovative approach not only opens doors to homeownership but also sets a solid foundation for a more secure financial future in the ever-evolving real estate market. If you’re a first-time homebuyer in a market with high interest rates, consider exploring the potential benefits of a 2-1 buy down with your real estate agent or lender to help make your dream of homeownership a reality. Have questions? Reach out, I’d be happy to help you get into your next home 😉

Kiersten Frey

Broker | OR

She/Her

Licensed Real Estate Broker working with home buyers & sellers, bringing ease & integrity to every transaction, while providing paramount customer service in the greater Portland area.

Read More

• T: 415-810-1428
• kiersten@livingroomre.com