As home values and mortgage rates increase in the South Carolina Lowcountry, many homebuyers seek options to make homeownership more affordable. Some are looking at the 2-1 buydown loan program. A 2-1 buydown loan is a mortgage lending approach that provides for a lower mortgage payment during the first two years of the loan term. In the first year, the principal and interest payment will be based on 2% below the note rate. The principal and interest payment will be based on 1% below the note rate in the second year. Then, for the remainder of the term, the payment will be based on the note rate (the actual interest rate on the loan).
Too good to be true?
Maybe, but here is how it goes. The buyer, seller, lender, or builder can fund the buydown. In addition, the buydown cost can be split between different parties in the transaction. The funds are collected at closing, placed in an escrow account, and paid monthly to make the full P&I payment at the note rate.
What’s appealing about this program is that homebuyers in South Carolina can purchase a new home at a more affordable payment giving them two years to make lower mortgage payments and ease into the full payment based on the note rate amount. So essentially, homebuyers will get two years of lower payments.
While borrowers can’t get cash out by using this program, the 2-1 buydown can be used for owner-occupied homes and second homes for purchases and rate and term refinance.
Who pays for the 2-1 buydown mortgage?
The buyer, seller, builder, or lender can pay for the buydown at MEP.
Why are we seeing the 2-1 buydown program now?
In an environment where mortgage rates are rising, the 2-1 buydown benefits homebuyers by helping them afford a larger mortgage and a more expensive home. It is especially appealing to first-time homebuyers who may be having trouble purchasing a home in the current market. In general, the 2-1 buydown will be great for anyone with limited income for a short time but who anticipates their income to increase significantly by year three of the loan. For example, some highly prepared recent college graduates might have just enough savings to make lower payments for a couple of years before landing that higher-paying job. There may be several other situations where this format makes sense for those who expect their future income to rise.However, homebuyers need to be cautious because if their income doesn’t increase as anticipated, they could be stretched too thin financially.
In a buyer’s market, the 2-1 buydown is often used to make it faster and easier for sellers to sell their homes at a reasonable price. The downside is that the funds the seller pays for the buydown come from the net proceeds of the home sale.
If you are interested in purchasing a new home in South Carolina and like the idea of easing into your mortgage payments, contact one of our team members today to learn more.