You’ve probably heard a lot about 2-1 temporary buydowns.
The idea sounds great. Your mortgage payment is reduced during the first year, reduced by a smaller amount during the second year, and then in year three you begin making the full payment based on your actual note rate.
There’s nothing inherently wrong with a 2-1 buydown. For the right borrower, it can be useful.
But it’s not always where I would choose to put the seller’s money.
You’re Still Qualifying for the Full Payment
This is the part that sometimes gets lost in the sales pitch.
A temporary buydown doesn’t necessarily allow you to qualify for a larger mortgage simply because your first-year payment is lower. With commonly used FHA temporary buydown structures, you’re qualified using the note rate and corresponding payment, not simply the temporarily reduced payment you’re making during the buydown period.
So the question I think buyers should ask is:
What is the best use of the seller’s contribution?
Would You Rather Save Money Temporarily — Or Bring Less Money to Closing?
FHA allows interested parties to contribute up to 6% of the sales price toward eligible costs, subject to FHA requirements and the actual allowable costs in the transaction.
Suppose a seller is willing to contribute a significant amount of money toward your purchase.
One option may be using part of that contribution to fund a 2-1 buydown.
Another option may be using more of the available seller contribution toward your eligible closing costs, prepaid expenses and other permitted items, potentially allowing you to keep more of your own money in the bank.
If I’m a buyer who is tight on cash, that’s a conversation I absolutely want to have.
Would I rather have a temporarily lower payment?
Or would I rather potentially bring thousands of dollars less to closing and keep more money available after I buy the house?
Personally, I’d want to see option #2.
Think Beyond the First Two Years
The reduced payment from a 2-1 buydown eventually goes away.
That’s why I don’t believe a temporary buydown should automatically be presented as the best option simply because the first-year payment looks attractive.
Show me what the buydown costs.
Show me what my full payment will be.
Then show me what happens if we use those available seller funds differently.
Now I can make an informed decision.
It’s About Options, Not Selling a Product
A 2-1 buydown isn’t good or bad. It’s a financing tool.
For one borrower, it might make perfect sense. For another borrower — particularly someone trying to preserve their savings — using available seller contributions toward eligible closing costs may be far more valuable.
That’s why I believe borrowers should be shown the numbers side by side before making the decision.
Don’t choose a mortgage strategy because it sounds good in an advertisement. Understand where the money is going, what you’re getting in return, and whether there’s a better way to use it.