FHA and Investor Specialist

     Mortgage financing tends to move in cycles in order to best meet the needs of the public.  Back in the early 90's, when there were more listings than buyers, seller concessions often were used as an incentive to enable first-time buyers to purchase a home.  Another tool used was the "seller paid buydown", or 2-1 buydown.  But what is a 2-1 buydown, how does it work, and more importantly how can it help to sell a home?  For example purposes, let's assume we have a home selling for $350,000 and a buyer looking to finance $300,000 on the home.

     At a current market rate of 6.25% on a 30 year fixed loan, the principal and interest comes to $1847.15 per month.  The way a 2-1 buydown works, a buyer can temporarily "buy down" their interest rate to 4.25% for their 1st year- at a payment of $1475.82, then 5.25% for their 2nd year paying $1656.61, then have their rate of 6.25% for years 3-30 at a payment of $1847.15.  

     The catch is that the savings in payments for the 2 years, which total $6742.44, are paid upfront as prepaid interest.  This can be paid in the form of a seller concession, builder concession, or be paid by the borrower upfront.   In this case, the seller concession is less than 2.5% of the purchase price.  The benefit lies in the fact that the financing is a fixed rate, a lower payment is offered without negative amortization, and the buyer knows ahead of time exactly what adjustments will be made in their payment.

     A motivated seller can differentiate themselves in today's market by offering a 2-1 buydown and Real Estate Agents can intrigue buyers by offering "special financing" on selected properties.