Get A Lower VA Loan Rate With a 2-1 Buydown
A VA loan is a mortgage that veterans can use to purchase a home with no down payment. VA loans have lower interest rates and do not require mortgage insurance, but you may be able to get even better financing by buying down your rate.
A 2-1 buydown is a mortgage agreement that provides a gradual interest-rate build-up. There is a low-interest rate for the first year of the loan, a somewhat higher rate the next year, and the full rate applies the third year.
Lower Your VA Loan Rate With A 2-1 Buydown
Buydowns are a great way to lower the interest rate on your VA mortgage. But how do they work? Let’s find out.
How Does A VA 2-1 Buydown Work?
A buydown is a real estate financing technique that allows buyers to take advantage of lower upfront rates to qualify for a VA home loan. While some buydowns are permanent, a 2-1 buydown is a temporary buydown, lasting for two years.
The interest rate on a 2-1 buydown loan will increase from one year to the next until it reaches its final rate in the third year. The catch? Lenders charge buyers additional fees for these rate reductions to compensate for the money they will lose on interest charges.
Buyers can't pay for a buy-down fee on their own, but it can be paid for with seller credit. Sellers often use 2-1 buydowns as an incentive for purchasers.
Example of a 2-1 Buydown Mortgage
Imagine that a home builder is offering a 2-1 buydown on new homes. If the market interest rate on 30-year mortgages is 7%, a homebuyer could get a mortgage rate of 5% in the first year, 6% in the second year, and 7% in the third and final year.
These changes can cost borrowers hundreds of dollars more per month on their mortgage payments with each increase. The benefit here is that buyers have a lower payment initially and build up to the full rate.
2-1 Buydown: Who Should Do It?
There are several advantages and disadvantages to a 2-1 buydown for both buyers and sellers.
A 2-1 buydown for home sellers can help them sell their homes faster. If they are having a hard time selling their home and want to offer an attractive incentive, a 2-1 buydown may be the ticket. However, they will lose money from paying for the buydown.
On the flip side, a 2-1 buydown has several potential benefits for buyers. It can help them afford a more expensive home than they might otherwise be able to, and it can help them adjust to the full rate over time. A buydown is typically a good idea for buyers that expect their income to rise over time.
The disadvantage to a buydown is that, if a buyer’s income does not rise, or even declines over time, the mortgage may be too expensive in that third year and they will be forced to sell. It’s essential that buyers take stock of their financial trajectory before agreeing to a buydown.
A 2-1 buydown is a mortgage agreement ideal for buyers that expect their income to rise over time. A 2-1 buydown offers a low-interest rate for the first year, a somewhat higher rate the next year, and the full for the third year of the loan. While buyers cannot pay for the buydown themselves, sellers often offer it as an incentive to purchase their home.
On a final note, it's important to keep in mind that buydowns are not available in some states, through all federal mortgage programs, or from all lenders.
Learn how to apply for a VA loan online with Military Homespot Lending. Click here for the details.