Our lender-paid 2-1 buydown offer is a huge hit. We had 170 requests for 2-1 buydown finance flyers last week alone, and our phones are ringing off the hook (or whatever you say nowadays when you get a lot of calls; maybe this… “we’re getting a large number of electronic indications that customer humans actually want to communicate verbally with JVM humans”).
Anyway – there is confusion regarding the difference between a SELLER-paid 2-1 buydown and a LENDER-paid 2-1 buydown.
A 2-1 buydown, as a quick reminder, offers borrowers a 2% under-market rate for the first year of the mortgage and a 1% under-market rate for the second year of the mortgage (and the “market rate” thereafter). Borrowers themselves are not allowed to pay for the buydowns, so only sellers, lenders, or other third parties can pay for 2-1 buydowns.
Why 2-1 Buydowns Are So Enticing
2-1 buydowns are extremely enticing right now for two reasons: (1) Borrowers are very rate-sensitive in today’s high-rate environment, so rates in the 5% range are exceptionally alluring; and (2) there is a very strong likelihood that rates will fall later this year in response to an economic slowdown.
Lower rates will enable buyers with 2-1 buydowns to refinance into a permanently lower rate (so they don’t have to worry about adjusting back to the market rate). And even better, when 2-1 buydown borrowers refinance, they get a refund (applied to their principal) of the unused portion of the buydown – even though they did not pay for the buydowns.
How Much Do 2-1 Buydowns Cost?
A 2-1 buydown costs about 2.25% of the loan amount on average. So, expect a cost of about $11,250 for a $500,000 loan.
Here is our JVM Lending Cost Of Buydowns Spreadsheet, once again, for readers who want to estimate costs on their own.
Seller Paid vs. Lender Paid
A seller could pay for the above 2-1 buydown scenario (for a $500,000 loan) with a seller credit equal to about 2% of the purchase price (depending on the actual price).
Sellers are often reluctant to offer credits, though, so we stepped in with our lender-paid option.
But the only way we can cover that 2.25% of loan amount cost is by increasing the market rate we offer.
So, while our lender-paid 2-1 buydown offer lowers a buyers payment by 2% under the market rate and still offers buyers rates in the 5% range, the ultimate market rate (for after the buydown period) the buyers will get will be anywhere from 1/4% to 1/2% higher than what it would be with a seller-paid 2-1 buydown.
To be sure, we lowered our margins to make our lender-paid buydowns even more enticing, but there is still “no free lunch.” We have to increase the market rate a bit to cover our costs.
So – the difference between a seller-paid and lender-paid 2-1 buydown is this: lender-paid buydowns come with slightly higher interest rates. However, they remain a fantastic way to secure a significantly lower rate for the first two years of the mortgage.
Note: An advantage with lender-paid buydowns is that they don’t come with an inflated purchase price too, as sellers often request higher prices to offset any credits they offer.
Low Balance Loans Only
This is a quick reminder that we can only offer our lender-paid 2-1 buydowns for “low balance” conforming loans – with a maximum loan amount of $806,500. Lender-paid 2-1 buydowns are not financially feasible for high-balance loans ($806,501 – $1,209,750) in high-cost areas.
Best Option: Hybrid (Lender and Seller Paying) Scenarios
The best option for many buyers is likely a hybrid scenario where the seller and the lender each pay a portion of the buydown cost. Splitting the cost makes the credit request much more palatable for sellers and it requires a much smaller credit/rate bump from the lender.
