Rates Back Off Their Highs: What a 2-1 Buydown Actually Saves You
The average 30-year fixed sits at 6.75% per Mortgage News Daily, unchanged yesterday and the lowest level in more than two weeks after touching 6.85%, a one-year high, in late July. Tomorrow morning's jobs report could push rates in either direction, and I won't pretend to know which. So this week I want to cover the question I've been getting most on the phone lately: what is a 2-1 buydown, what does it actually save, and who should ask for one? The math surprises most people.
The week in rates
After the climb I covered in last week's Fed day post, bonds finally caught a break. Steady oil prices and a quiet data calendar let the average drift down from 6.85% to 6.75%, and it has held there for two straight days. The next scheduled test is tomorrow's jobs report. A weak number would likely help rates, a strong one would likely hurt, and nobody knows which we'll get. That uncertainty is exactly why the rest of this post is about something you can control no matter what the market does: the structure of your own loan.
What a 2-1 buydown actually is
A 2-1 buydown is a temporary rate reduction, usually paid for by the seller or builder as a closing credit. Your payment is calculated as if your rate were 2% lower in year one and 1% lower in year two. From year three on, you pay the full note rate you locked. The unused subsidy sits in an escrow account and covers the difference each month.
Two things people get wrong about it. First, it is not an adjustable-rate mortgage. Your note rate never goes above the rate you locked on day one; the first two years are simply discounted. Second, the money isn't lost if you refinance early: if rates drop and you refinance in year one or two, the unused portion of the buydown funds is typically credited back against your loan payoff.
The math on a real loan
Let's use a $400,000 loan at our posted 30-year rate of 6.375%, which you can see on the live rates page, updated every morning. The full principal-and-interest payment at 6.375% is about $2,495.
With a 2-1 buydown, year one is calculated at 4.375%: about $1,997, a savings of roughly $498 a month, or about $5,980 over the year. Year two is calculated at 5.375%: about $2,240, saving roughly $256 a month, or about $3,067 for the year. Total subsidy: about $9,047, and in most of the deals I structure, the seller funds it as part of the purchase negotiation. That is over nine thousand dollars of payment relief in your first two years of ownership, without paying a penny more for the house.
One more number while we're at it: the national average is 6.75%, but our posted rate is 6.375%. On that same $400,000 loan that gap alone is about $2,495 versus $2,594, roughly $99 a month, or close to $1,200 a year, just for shopping instead of taking the average.
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Who should ask for one, and who shouldn't
Buydowns shine when the seller pays. In markets where homes are sitting longer, sellers and builders are often more willing to fund a buydown than to cut the price, and for your monthly budget the buydown is frequently the better deal in the early years. They make particular sense if your income is likely to grow into the full payment, or if you'd rather keep cash in reserves than stretch for a bigger down payment.
Where I pump the brakes: paying for a buydown out of your own pocket usually isn't the best use of the same dollars, permanent discount points or simply a bigger down payment often win the long game. And never take a payment you can only afford at the teased year-one rate on the assumption you'll refinance before year three. Rates may cooperate, they may not. Qualify at the real payment, treat the buydown as breathing room.
Where we stand
The rest of the survey picture: the MND 15-year average is at 6.29%, FHA at 6.31%, VA at 6.32%, jumbo at 6.89%, and Freddie Mac's weekly survey printed 6.66% last Thursday. Tomorrow's jobs report is the next big scheduled event for rates, and I'll cover how the market digests it next week. For the short version in your inbox, subscribe to the free rate alert list. And if you want to see what a buydown looks like on your own numbers, my number is at the top of the page. I answer it personally.