October 2023 Real Estate Newsletter: How Does a 2-1 Buy Down Work?

A 2-1 buy down helps home buyers save money on their mortgage payments for the first two years of their note/mortgage. Here is an example: We’ll say the prevailing interest rate is 7.25%. This (7.25%) is the interest rate that the home-buyer would have to qualify for. So, with a 2-1 buy down, the starting interest rate (for the first year) will be 5.25% and then the second year the interest rate will be 6.25% and then year 3 through 30 the interest rate would be 7.25%. This is what the monthly payments (PITI = principle, interest, taxes and insurance) would look like on a $500,000.00 home with 10% down on a conventional loan. 5.25 % $3,46492 … 6.25% = $3,750.73 … and 7.25% = $4,049.79. The cost of this program varies. In general, the buyer asks the seller to pay for this and some sellers offer this as an incentive (ie… new home builders). (This is just an example, there are other ways to do this but this gives you a really good idea of how it works).

This is a good way to get into a home, because we are still in a housing shortage and I believe the home prices are going to continue to rise. And, if someone is in their earning years or they are likely to get substantial raises…or a spouse is out of the workforce but will be coming back in, this might be a good avenue for home ownership. Plus, some economists believe that when the Federal Reserve hits their 2% inflation target, they will start to lower the interest rates. And if the interest rates (mortgage rates) get to a point that makes sense to refinance (re-fi) then a homeowner may be able to re-fi to a lower rate and save a bit on their mortgage. The one thing to remember, a home buyer that is able to do the 2-1 buy down has to be comfortable with the higher interest rate, because after the 2nd year, that is the payment that they will be making for the next 28 years…. IF the interest rates Don’t ever come down

Building Wealth with Real Estate:

The attached flyer has some Great information on how investing in real estate can create wealth for you and your family. Here’s a couple quick reasons to invest in real estate: 1. Rental properties are a great hedge against inflation. 2. You may be eligible for extra tax break or incentives. 3. If you have a loan on the property even if you don’t have positive cash flow, the tenant is helping you pay for your mortgage and in the long run, you are building equity and a good-sized nest egg for the future. 

If you have any questions on this or any other real estate related matter feel free to give me a call and if you want a quick home value, go to thishomesvalue.com and one will be sent to you right away.

Take care and be safe out there.

Sincerely, Ron Hier, 661-406-1562

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