The talk of the town – a 2-1 buydown

If you have not heard of the term "2-1 buydown," you likely will soon. Like a 1980's fashion trend coming back full circle, loan programs can do the same. This is not at all a new concept, or program but a time in the market that makes, for many, a very smart loan strategy. So what exactly is a 2-1 buydown and is it a good option for your potential loan strategy as a buyer?

In reality, a 2-1 buydown is a temporary interest buyout, not a buydown at all. This special temporary reduction in the buyer's payment is a favorite in this current market because the buyer gets to take advantage of a much lower payment for a temporary period of time. With a 2-1 buydown, that period is for 2 years. There are also 3-2-1, 1-1, 1.5-2.5 programs, as well. Each of them with differing terms as to how long the temporary buyout period is for. For example, in a 3-2-1 buydown you'll have 3 years of lowered payments.

In a 2-1 buydown, the buyer utilizes seller or lender credit to offset the partial interest portion of their payment, resulting in a lower principal and interest payment in the set time frame of years. The result is equivalent to a lower interest rate up front. For example, on a $350,000 loan amount, if the non-discounted interest rate was 6.25% on a 30 year fixed, then the buyer's locked set interest rate is 6.25%. When seller or lender credit is applied to a 2-1 temporary buyout, the buyer pays a payment in months 1-12 equal to a 4.25% rate saving them $433.22 a month ($5,198.65 in the year). In months 13-24 equal to a 5.25% rate, savings $222.30 per month ($2,667.57 in the second year). In the third year, if the homeowner has not sold or refinanced they would begin the full payment at the locked rate for the remaining term of the loan. The annual amount saved is what is paid by seller or lender credit instead of by the buyer. (It is most common to use seller credit, as lender credit would typically result in a higher interest rate than using seller credit.)

As you can see, this is a substantial saving for many on a monthly basis and perhaps the difference between being able to work into the payment of their new home. Perhaps the perfect amount of time for a new job to take effect, a raise to be in place or a bill to be paid off.

Better yet, increase your credit scores, make improvements to the home that increases value, and/or wait for interest rates to possibly come down some then refinance to a new, lower, permanent interest rate.

This example does not take into account fees or discount points. It's just simple interest-style payment and an actual estimate for your situation should be reviewed with a licensed loan officer specific to your situation.

Alysha Boles is a Mortgage Loan Advisor and Debt Strategist that specializes in both the planning, pre-approval and loan process of mortgage lending. Licensed in California and Texas and the ability to connect you with a licensed professional in all 50 states. She can be reached at (661) 858-7214, or inquire online at http://www.advisoralysha.com.