Today’s high Mortgage rates pose challenges for homebuyers. Comparing a $300,000 mortgage at 3.0% in 2021, homeowners paid $1,265 monthly. Now, with an 8.0% interest rate, that same mortgage costs $2,200 monthly. Additional expenses like taxes and insurance further increase the monthly payment. Many aspiring homebuyers find it challenging to navigate these rates, even if they have the financial means. Nevertheless, some workarounds exist to temporarily reduce the monthly cost of homeownership until interest rates decrease. Let me explain

2/1 Temporary Buydowns

2/1 buydowns are becoming a common occurrence especially with today’s interest rates hurting everyone. A 2/1 buydown is a buydown that will temporarily bring down the interest rates for two years, and each year the interest rate will increase by 1% until it reaches the interest rate that was originally on the loan. For example, let’s say if someone bought a home at an 8% interest rate they would qualify for the 8% interest rate. There would be a buydown of a certain amount and it would consequently drop the interest rate down to 6% for the first year of the mortgage. Check out Fairway’s blog for more information Rate Rescue – Fairway Independent Mortgage Kitsap (fairwaywahomeloans.com)

The Advantages of the 2/1 Buydown

There are a couple of advantages to the 2/1 buydown. The first is that it obviously knocks down the interest rate by 2 percentage points and temporarily alleviates the pain of an 8% mortgage for the homebuyer. This is huge, especially in today’s market and the state of the economy. Especially as consumers are struggling to pay credit card debt and loans. Fed data shows some consumers are starting to fall behind (axios.com). Another advantage to the 2/1 buydown is that if interest rates during the 2/1 buydown drop homeowners can refinance into lower fixed rates.

The Disadvantages of the 2/1 Buydown

As with everything there are potential disadvantages to the 2/1 Buydown. The first is that in the event that interest rates do not go down and they stay the same homeowners could be stuck with mortgage rates that they do not want to pay for in the first place. This is very important to consider when buying a home as it could create problems in the future.

Conclusion

2/1 Buydowns are one of many tools that homebuyers can use to help alleviate the historically high mortgage rates we are experiencing now.