One of the incentives that sellers are offering these days in order to entice more buyers who may be put off by current interest rates is a "2/1 Buy Down." What does that mean? It is a a mortgage financing agreement that offers a lower rate the first year of the loan, a slightly higher rate the second year of the loan and then it settles into it permanent rate/payment the third year of the loan. For example, right now let's say the buyer qualifies for a 7 percent mortgage rate. With the buy down they could be at 5 percent the first year, 6 percent the second year and then in year three the rate will go to 7 percent which is fixed for the rest of the term of the 30 year mortgage.
Sounds good? It can be, particularly if the seller is paying for it. The cost of this can be paid points (each point is 1 percent of the loan amount) or a dollar amount paid into a lender escrow account to subsidize the loan payments. This makes up for the interest the lender would be missing out on the loan.
If you are a buyer this can help you get into a more expensive property but be careful not to over stretch. You don't want to find that in three years you cannot afford the higher payment amount and you have to sell the house. These deals are good if you know that you are in a job that will continue to pay you more each year or if you feel interest rates will come down within the three years and you will refinance.