With interest rates hovering in the 8% range, and home prices holding steady, many potential buyers feel squeezed out of this market. Some creative home builders and sellers are offering 2/1 or 3/2/1 mortgage buy-downs to entice buyers.
A 2/1 mortgage buy-down is a financial arrangement where a seller or builder escrows a subsidy for the difference in monthly payments between the effective interest rate and the effective interest rate minus two percent for the first year, and minus one percent for the second year. The funds are disbursed monthly to pay for the difference in rate. Here’s an example where a builder or seller has escrowed $17,016 for the buyer:
The escrow subsidizes lower monthly mortgage payments for the first two years. Payments revert to the original rate for the loan term at year three. The number of years and the amount paid can be structured in many ways.
Advantages for Homebuyers — The most significant advantage of a mortgage buy-down is the two-year reduction in monthly mortgage payments. This makes homeownership more affordable and eases the monthly financial burden on buyers at first. This strategy may be a real treat if rates drop in two years, as projected by Federal Reserve Economic Data (FRED) research, and the buyer refinances at a lower rate. Many lenders are offering “no-cost” refinances as part of their portfolio in anticipation of rates coming down and clients looking to lock into lower rates down the road.
Advantages for Sellers — Offering a mortgage buy-down option can make a property more attractive to potential buyers. It can set your listing apart in a competitive market and make a quicker sale. Sellers may have more leverage in negotiating sales price and other terms, as it sweetens the deal for buyers.
So, trick or treat? Ultimately, the buyer always pays. There is no free lunch, free shipping, or bags fly free. The buyer is paying for the home, and for the seller to subsidize the financing. The advantage for the buyer is that the subsidy amount is rolled into their overall financing cost and does not come out of their pocket during the initial years of the loan.