A 2-1 rate "buy down" get's you a lower interest rate. First two years of the loan.
How does it work?
You will ask for a “buy down” or a large sum of cash from the Seller put towards closing costs. This amount of cash at close goes to the lender to “buy down” the rate for the first two years.
The first year the rate is 2% less. The second year of the loan the rate is 1% less. This can drastically affect the monthly payment amount. Let’s see an example:
A real life example:
7980 Rucker Rd, Indianapolis, IN 46250
- The situation: First time buyers working with me as their Realtor
- The home: 7980 Rucker Rd, Indianapolis, IN 46250. The home had 22 days on market.
- The price: $280,000
- The financing route: 10% Down, 30 year conventional mortgage
- The average interest rate at that moment: 7.0%
It’s November 2022. Interest rates hiked 4 percentage points from the beginning of the year. From 3% to around 7%. Here’s the monthly payment my buyers were looking at:
- Monthly payment (no-buy down): $1677
*without Homeowner’s Insurance or Property Taxes
Enter the 2-1 buy-down:
When advising the buyers on how to approach submitting an offer I suggested they check with their lender about a 2-1 rate buy down. This would make that hefty $1677 payment much lighter the first couple years. Best part is, the seller would foot the bill on it!
We called the lender. He said that the cost of a 2-1 buy down was $5,880. So here’s what I suggested as their Realtor:
“Guys, I would suggest going in at around asking, but then ask for a 2-1 rate buy down. Remember, this does decrease the seller’s net proceeds from the sale, so we don’t want to come in at too low of a price if we do a buy-down.”
They agreed. So, I wrote it into the Further Conditions on the Purchase Agreement.
After some back and forth with the seller, they agreed.
How much will they save?
Original monthly payment: $1677
- Buy-down first year’s payment: $1353
- Buy-down second year’s payment: $1511
Then, the second year they will save $166 per month, for a total of $1,992 on the year.
- Total savings from the buy-down: $5,880!
What about the higher rate later?
This is indeed a concern. Becuase by year three, the monthly payment is back up to $1677.
However, remember that you can always refinancing if/when interest rates drop. Which is quite likely in our economic climate.
Keep in mind, your income will also rise. By year 3, you may very well be able to afford that payment.
The point is, you have options.
Your next steps
If you think a buy-down makes sense for you, make sure your Realtor and Lender are familiar and can do that.
Also, keep in mind, you need some leverage as the buyer to do this.
It is NOT advisable to try to do this the first week a listing is on the market.
You may just get laughed off by the seller. I suggest my clients employ this if the listing as at least 20 days on the market.
It’s a great tool!
About the author:
Tyler Lingle is an active Realtor in the Indianapolis metro area. He is also a real estate investor, specializing in rentals and short-term rentals. Tyler helped his clients sell over $10 million in transaction volume this past year!
tyler@tylerlingle.com
317-443-5258
