A 2-1 Buydown Can Make It Easier To Buy A House In Washington DC
If you’ve been thinking about buying a Washington DC home you’ve probably noticed that the interest rates for home loans have gone up quite a bit in the past year. And the rates may increase even more. As recently as November the FED increased mortgage interest rates again. Currently the interest rate is over 7%, which can make some buyers worry about their chances of getting approved. It can also make lenders leery of extending mortgages to some buyers.
But a higher interest rate doesn’t mean that you can’t afford to buy a home in Washington DC. There are some financial options that can make a high interest rate less of a problem to home buyer and sellers like a 2-1 buydown.
What’s A 2-1 Buydown?
A 2-1 buydown lowers the interest rate for a home buyer temporarily. That little bit of extra breathing room can make it easier for home buyers in Washington DC, especially first time buyers, to afford their home. For the first year the interest rate will be 2 points below the market rate when the home is purchased. In the second year it will be 1 point below the market rate.
And then in the third year it goes back to the full interest rate that was current at the time of the purchase of the home. If the interest rate has dropped to a more reasonable level after the three year period of the 2-1 buydown then the homeowner can look into refinancing to lower their mortgage payments.
Is A 2-1 Buydown Right For You?
For some buyers a 2-1 buydown is a fantastic way to make it easier to get into a new Washington DC home immediately. The lower interest rate makes it easier to get mortgage financing and it can lower the monthly payment of the mortgage for those first few years. Some of the people who can benefit the most from a 2-1 buydown include:
Students or grad students who have only a couple of years left in school can take advantage of a 2-1 buydown and buy a house now rather than waiting. The lower interest rage that they will get from the 2-1 buydown will make it more affordable to for them to pay their mortgage payments while they are still in school and earning less. By the time the interest rate returns to normal they will be out of school and making more money. One they have a career job they will be able to absorb the increased costs caused by the mortgage rate going back up.
- Military Families And Government Workers
Military families stationed in the Washington DC area who will probably be moving in just a few years can use the 2-1 buydown to keep their moving costs low. The lower mortgage rate will give them some financial breathing room to get on their feet after moving to the DC area.
Since the metro area can be more expensive to live in than other places having a discounted mortgage payment every month can really help military families make ends meet and enjoy living in their home.
Government workers or people who work for political candidates can also use the savings from a 2-1 buydown to help their bottom line when they first move to Washington DC and want to buy a home.
- First Time Buyers
First time home buyers who are worried about the expenses associated with buying a home can use the extra financial breathing room offered by the 2-1 buydown to make sure they’re on solid financial footing after the home purchase. And if they need to do any upgrades or repairs to the home they will have some extra money to make those changes.
- People Expecting A Wage Increase Or Additional Income
People who went remote during the pandemic and took a pay cut but expect to go back into the office could benefit from using a 2-1 buydown to buy a home in Washington DC. Anyone who is expecting a raise or a promotion within two years can give themselves a financial cushion with the buydown. So can couples where one person has stayed out of work to watch the kids but that person plans to go back to work in two to three years when the kids are in school.
If you think that a 2-1 buydown could help you buy a home in Washington DC contact Matt Borgerson to get more information about the benefits of a 2-1 buydown.
How A 2-1 Buydown Works
There is a cost associated with getting a 2-1 buydown. Because the lender is losing money by charging a lower interest rate for two years the fee for the buydown is meant to make up for that loss. Either the homebuyer or seller can pay the cost, or sometimes they split the cost. When a seller is very motivated to sell their home they may offer to pay the fee for a buydown as an incentive to interest a buyer. Or if a home has sat on the market for awhile a seller may be open to paying the fee for a buydown to help the buyer afford to buy the home.
But in the current market homebuyers should be prepared to pay the fee for a 2-1 buydown themselves. Even though home sales in Washington DC have slightly declined but there is still high demand.
If you choose a 2-1 buydown for the first year of the mortgage your mortgage rate will be 2 points lower than the rate that is on your mortgage loan documents. In the second year of the mortgage the interest rate will be 1 point lower than the mortgage rate on the loan documents. And in the 3rd year of the mortgage the interest rate will be the full mortgage rate on the documents. A buydown is a temporary reduction in interest rate.
How Does That Affect Your Payment?
Let’s look at an example to see how a 2-1 buydown would impact a typical mortgage payment. If you buy a Washington DC home with a 30 year mortgage at a 5% interest rate for the first year your mortgage interest rate would be just 3%. In year 2 it would go up to 4%. And in year 3 it would go to the full 5%.
If you buy a home in DC that is $700,000 on a 30 year mortgage at 5% with a 2-1 buydown your monthly payment for the first year would be $2,951. The second year your monthly payment would go up slightly to $3,342 and in the third year it would go up to the full 5% rate which would be $3,758. It would then remain at $3,758 for the rest of the length of the mortgage.
If you still have questions about a 2-1 buydown or you want to talk about financing to buy a home in Washington DC get in touch with us today. We’d be happy to go over your options with you and help you find the perfect house in DC for you and your family.