What is the difference between a 2/1 Buydown, Discount Points, and Seller Concessions?
Lots of talk at the moment about all of these options and it can be confusing for most people. All of these options are geared to help buyers be able to afford a home since the interest rates have skyrocketed through 2021-2022
2/1 buy down is when your rate drops by 2% for the first year, THEN 1% for the second year, THEN to the full rate from year 3-30. This temporary and stair step rate drop is in exchange for upfront money to the lender, this can be paid by the buyer or the seller. 2/1 buy downs have become popular from sellers offering to pay for the 2/1 buydown as an incentive to purchase their home versus other sellers not offering the 2/1 buy down. This approach would be ideal if you knew you would have the property for a short period of time, OR if you intend to refinance in a year or two.
Example: If the original starting rate is 6%, your first year of payments will be at 4% interest, 2nd year of payments will be at 5% interest and 3rd year through the life of the loan will be back to the original 6%.
Discount points is when you can buy down your interest rate PERMANENTLY in exchange for upfront money to the lender. This can be paid by the seller or the buyer. Similar to the 2/1 buy-down, the biggest difference is that this decreased interest rate stays through the life of the loan. This may make more sense if you intend to keep the property for longer periods of time without re-financing.
Example: If the original starting rate is 6% and the rate is bought down to 4.75%, your rate on the property would be 4.75% for the life of the loan.
Seller Concessions is when the seller will contribute a dollar amount to buyers at closing. Depending on the wording of the purchase agreement, this money can be used towards buyers closing costs, to buy down the interest rate, OR both. This money is a set dollar amount from the purchase agreement that has some flexibility in how the buyer can use it.
Example: Buyer has been told by their lender that closing costs will be $7k. Instead of coming out of pocket for this $7k, in the purchase agreement, it is agreed by both the buyer and the seller that the “SELLER will contribute $7k towards the buyers closing costs, pre-paids, and discount points.” Along the way to closing, the lender was able to shave off $2k of what they originally thought for closing costs. So the $7k of closing costs is now $5k. Buyer can now fully pay that now $5k in closing costs from the seller at closing AND buy down the interest rate with the remaining $2k already negotiated!
Hope this is helpful information and explains a few of the options that are available!
Marcus Walker, BCCS – Waters Edge Realty
Baldwin County Certified Specialist