Hey Kyle here with WinTheHouseYouLove.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 gonna show you how a 2-1 buy down works in detail.
I'm also gonna 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 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 7% interest rate.
Okay?
So this is going to be what's called our Note Rate.
Now, 7% is going to start in year three through 30.
Okay?
The way the 2-1 buy down works is that in year one year rate is 2% lower,
meaning that it would be 5% in year one.
In year two, it's 1% lower, meaning it's then going to be 6% in year two.
And then we get to year seven, I'm sorry, year three, and it's now 7%.
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 three 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, 7% interest here.
So basically what's happening is you're gonna negotiate for the
seller or the builder to give you a credit to offset the monthly payment.
Okay?
Cause you still have the note rate of 7% 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 5% rate or a 6% rate.
Great.
Okay.
And 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, kind of ways the interest 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 7% 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, So maybe the first five years is fixed at, let's
say 6%, 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, 2% lower year two, 1% 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 as a 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 wanna buy this home.
I wanna buy it for, let's say $400,000.
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's gonna 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.
And they're gonna 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 2-1 buy down calculator.
It's a hard word 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 $400,000 right here.
We can see the loan amount and our down payment, let's say we're doing
5% down, maybe this is a conventional loan, so $20,000 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 7.25%, 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 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 $2,040 per month.
This is when it's 2% lower.
So effectively you're getting a 5% interest rate on this.
Even though the loan was going to be seven, you're getting 5% in year one.
So this is $488 less per month for the first full year than your normal payment.
Then in year two, your payment is going to go up to $2,278 per month.
Your interest rate is 1% lower, bringing it to 6%, 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 7%, and this is your normal payment, $2,528/month.
So you can see here, you know, if you're looking at buying a house and you're,
you say, This is the $400,000 house.
We really want it.
But $2,500 right now is going to be a little tough to swallow with how, 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.
If that's the case, then you can then refinance into a lower interest loan.
It takes something like the $2,000 per month for the first year,
22, almost 2300 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 30.
So we can see how this increases.
We can also see how the interest rate changes as well.
Year one, it's a 5%.
Year two, it's at 6.
Years three through 30 are at 7%.
Same thing, same 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 $5,800 reduction that we're
not paying in monthly payments.
In year two, that's almost $3,000 that we're not paying on that monthly payment.
Total, that's $8,857.
That's going to be put into an escrow account.
So we can see here, we will need $8,857 from the seller or the builder.
Okay?
And that's effectively 2.21% 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 7.25% rate.
We're gonna need $10,000 from the seller or the builder.
Now, if you refinance before, that two years is up, you can
actually get that money back.
Okay?
So let's say, you wanna refinance and let's say, you know, let's say interest
rates drop, 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, you know, paying down the rate on your new mortgage if
you want to, or used 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 explore this.
As you are walking through this, I wanna see different numbers, and you
can talk with your realtor about these numbers, show them this calculator, plug
in, 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 there.
Okay, so really basic requirements.
This is only for primary loans, so meaning 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 0%, VA is 0%.
FHA is 3.5% down.
Conventional for first time buyers is 3% down.
If you're not a first time buyer or you're buying in a high cost of
living area, it's going to be 5% 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 gonna be the requirement 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 7%, if we're looking at 7%, even though in
the first year our interest rate is gonna be 5% and the second year it's gonna
be 6%, and the third year it's gonna be seven, we have to qualify based on the
7% interest rate and that higher payment.
So if I go back to our calculator here, right, Let's take a look
at, you know 7% at 400,000.
Even though our first year's payment is gonna be $2,040, we have to
qualify with our debt-to-income ratio at $2,500 per month.
And if you wanna learn more about how debt-to-income ratios work
and qualifying for a loan, you can search that on my channel as well.
Okay.
Now, there are two other options or two other alternatives to
this are a little less common.
There's a 1-0 buy down and a 3-2-1 buy down, and it works very similarly where
the two one buy down says first year is lower by 2%, Second year is lower by 1%,
and then it's normal on the third year.
3-2-1 buy down works in the same way where the first year is lower by 3%.
Second year is lower by 2%.
Third year is lower by 1%.
Fourth year is normal.
And the 1-0 is the first year is lowered by 1%.
And the second year is normal.
These are a lot less common.
3-2-1 is a lot more expensive cuz we're requesting a lot
more from the seller there.
And something to consider as well, 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 wanna buy your home, but I.
$8,800 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 slowly declining.
Okay, so here are some alternatives that you can do because we're
already gonna 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, one buy down program.
We could also, instead of using the temporary buy down, if
you need money towards closing cost, 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 $8,000 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 seller 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, they have a business,
they're trying to make money as well.
And so what I see happen a lot of times, or what I've been seeing
recently is these programs kind of get pushed as like, this is fantastic.
You're gonna get a, you know, there's no consequence to this at all, and there
isn't really a 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 pitch it as like, this is the best program ever.
And you know, there are all 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, $2,000 monthly payment for the first year and be like,
that's perfect, but all of a sudden when it comes to $2,500 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 gonna increase in the future.
And 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 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 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 to lower.
We wanna 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 our sell.
Okay?
So ultimately make sure you're also getting a fair price on the home, not
just being sold on a monthly payment.
Then we'll just look at home.
You know, for instance, we're looking at $400,000 home and say, Great,
$2,000 a month in principal and interest sounds fantastic, but is
that home actually worth 400,000?
You can talk to your real estate agent, have them run CMA report, a
comparative market analysis to see is that home actually worth $400,000?
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 upfront,
or feel free to give me an email.
If you wanna learn more about how to buy a home, check out this video right here.