With the concern over interest rates, you might want to consider a loan option that makes it affordable to buy a new home: the mortgage buydown. Let’s look at the 2-1 buydown vs fixed rate buydown.

What is a rate buydown?

A rate buydown is a financing option that lets you pay extra money at closing to lower your interest rate for the home loan. You’re paying the difference, measured in points (percentage). The money goes into an escrow account and is paid on the account, while you’re paying the mortgage at the lower rate.

A rate buydown can be temporary or permanent (fixed). A temporary buydown impacts the early years of the loan and then assumes the full rate, as determined at closing. There are various structures for a temporary rate buydown; a 2-1 buydown and 3-2-1 buydown are the most common.

A permanent option is a fixed-rate buydown, which lowers the rate for the loan's full term. Bear in mind, that the longer the term of the buydown, the more it will cost to purchase at closing.

In some cases—as with New Home Inc.—the builder or seller pays the rate buydown. You benefit from the lower interest rate without funding the buydown yourself. In almost all cases, the seller is allowed to pay more to buy the rate down on behalf of the buyer than the buyer is allowed to do for themselves.

How much does a buydown cost?

Generally, you have the option of lowering the rate by .25% for the cost of one point (or percentage) of your loan. If you’re borrowing $400,000 at a rate of 7%, you’d pay $4,000 to reduce the rate to 6.75%. It would cost $16,000 to lower the interest rate by a full point, to 6%. 

A $400,000 30-year fixed-rate loan would have a monthly payment of $2,661.20 at 7%. If you lowered it with a rate buydown to 6%, the monthly payment would be $2,398.20. Over the course of the 30-year period, that 1% buydown would save you $94,680. 

2-1 buydown

A 2-1 buydown is a short-term option. You reduce the rate for the first two years of the loan—by 2% the first year and by 1% the second year. At the start of the third year, the loan reverts to the interest rate you agreed to at closing.

For example, if the current rate is 7%, you’d pay 5% in Year 1, 6% in Year 2, and 7% in Years 3 through 30 (for a 30-year fixed rate loan).

3-2-1 buydown

A 3-2-1 buydown mortgage reduces your interest rate for three years, as compared to two years for the 2-1 buydown. With this longer option, you lower the interest rate by 3% the first year, 2% the second year, and 1% the third year. Beginning with Year 4, you pay the full interest rate.

It might seem like you’re either paying now or later, but a rate buydown can save you considerable money in the long run.

Either of these buydown structures presents a good choice to help you afford the initial purchase of the home. If rates go down, you can refinance. In the meantime, you’re guaranteed lower rates for the first two years. Meanwhile, you’re gaining equity in your home.

Which rate buydown is right for me?

How do you decide if a rate buydown is the right financing option for you? The answer certainly depends on whether you’re footing the cost or the seller is. If the cost is yours, how much can you afford to pay to lower the interest rate? Can you fund the difference?

But…if the seller is paying the buydown, it’s an offer you shouldn’t refuse. 

As you’re considering a temporary rate buydown, be sure that you are comfortable with the monthly payment when it reaches the full interest rate. Like an adjustable rate mortgage, you should use the early term of the loan—when the rate is lower—to prepare for the eventual change in payment. Maybe you’re not planning to stay in the home much longer than a few years. Or you’re confident your income is going to increase more than the rise in your monthly mortgage payment. Whatever the situation, be prepared!

The length of time you plan to live in your new home also impacts your decision of choosing between the rate buydown options: 2-1 buydown vs fixed rate buydown. Since a fixed-rate buydown costs more to purchase at closing, you should only choose this structure if you expect your purchase to be a long-term investment. Otherwise, strongly consider the temporary rate buydown (3-2-1 buydown or 2-1 buydown).

Next, make sure the home you’re looking to buy qualifies for a rate buydown. Some FHA loans and USDA loans have restrictions, and you cannot use a rate buydown when purchasing an investment property.

Buydowns on homes for sale near Raleigh, NC

New Home Inc. understands homebuyers are feeling the strain of current mortgage interest rates. We started this company with the mission of giving our customers more than they expect. We elevated the standards for innovating, for incorporating safety and healthy home features, and for communicating openly with our buyers.

That same commitment extends to making homebuying more affordable. We’re currently offering a fixed-rate buydown. Qualified buyers can get a rate as low as 5.5% for a 30-year fixed-rate loan. 

Use this offer to purchase one of our new homes for sale near Raleigh, NC. We’re building communities of townhomes and single-family homes (both ranch-style and multi-story homes) in some of the most enticing Raleigh suburbs: Fuquay-Varina, Lillington, Willow Spring, and Clayton. Many of the neighborhoods include large yards for single-family homes—and every one of them is in a convenient location.

When you choose a New Home Inc. home, you also benefit from greater value. We include features you might expect to pay extra to get in your new home. When we build a home, we do it with the vision that it’s one we would want to live in. That means smartly styled layouts, plenty of storage, lots of windows to stream natural light, and a few other very important details.

Smart home automation

We know that smart home automation is high on the wish list of today’s homebuyers. Our standard package provides security (video doorbell, smart lock), convenience (smart home network panel), and energy efficiency (smart thermostat). You don’t have to install these features after moving in. Plus, with this system in place, it’s easy to add more smart devices into your household in the future.

A high-performing kitchen

Your kitchen is the most highly functioning room in your home—or should be. You’re not just cooking and cleaning up, but trying to get everything done while dodging a steady stream of traffic. And you use your counter space for more than prep—casual dining, doing homework, sorting mail, to name a few. To help, New Home Inc. includes an oversized kitchen island with seating on 3 sides to accommodate more people than a smaller island.

We also expand your storage. In addition to the kitchen pantry, our separate “messy kitchen” service pantry adds a serving, storage, and clean-up space beyond your kitchen, reducing the clutter and traffic. The messy kitchen is the perfect place to stash things you don’t need on a regular basis, like that spiralizer and cookie press that seemed like a must-have, and holiday serving ware and linens.

Protect your home deliveries

New Home Inc.’s Smart Door Delivery Center ensures your home deliveries are left in a safe space. It’s a fully enclosed, climate-controlled space between your exterior and interior front doors. The delivery person receives a code to authorize entry only to the delivery space. The door automatically locks afterward. Your packages are protected from the weather and from overly curious passersby.

A healthy and energy-efficient home

Our homes are built to the ecoSelect Home Efficiency Program, which certifies your home’s efficiency by a third-party inspector. We also include a whole home air filtration system as a standard feature. This system protects the quality of the air flowing in and through your home.

And when you’re ready to rely on an electric vehicle, your garage will be equally prepared. Your New Home Inc. home comes with an electric vehicle charging station rough-in. When you need this function, the installation is simple.

Stay connected with CAT6 cabling.

Your new home is wired with CAT6 cabling—a higher standard that delivers strong, reliable connections without dead zones. This is an important feature for households with multiple people using a variety of devices that put high demand on your network and connectivity.

Imagine getting so much more in your new home AND getting it all with a lower interest rate! New Home Inc. wants to be more than your builder. We want to be your trusted partner in finding and purchasing the perfect new home that fits your lifestyle and budget.

Contact us at New Home Inc. for details on our new homes for sale near Raleigh, NC, and the rate buydown offer. But don’t wait because this financing offer and these homes aren’t going to be available for long.