2-1 Buydown vs. ARM: 3 Questions to Ask Your Nevada County Lender

With 30-year rates near 7.4%, a lot of Nevada County buyers are asking me the same thing: should I take a 2-1 buydown or an adjustable-rate mortgage? The 2-1 buydown vs ARM question is a good one, because both lower your payment early and both can bite you later if you don't understand them. I'm not a lender and this isn't loan advice. What I can do is show you the math on a typical local home and give you three questions to bring to your lender.

How a 2-1 Buydown Works on a Nevada County Home

A 2-1 buydown is a fixed-rate loan with a discount at the start. Your rate is 2 points lower in year one, 1 point lower in year two, and then it settles at the full note rate for the remaining 28 years. The rate does not float. It is set on day one.

Here is the math on a home priced at $607,801, the countywide average sale price in my July Metrolist MLS data. With 20% down the loan is about $486,000. Principal and interest only, using a 7.4% note rate:

• Year one at 5.4%: about $2,729 a month
• Year two at 6.4%: about $3,040 a month
• Year three and beyond at 7.4%: about $3,365 a month

That saves you roughly $636 a month in year one and $325 in year two, or about $11,500 over two years. Somebody has to pay for that, though. Usually it is the seller or builder through a credit, and sometimes it is you. Ask yourself whether you would rather have the credit as a lower price or a lower permanent rate instead.

How an ARM Compares for Nevada County Buyers

An adjustable-rate mortgage, or ARM, starts with a lower fixed rate for a set period, often 5, 7, or 10 years, then adjusts up or down. The discount lasts longer than a buydown, but the rate after the fixed period is not guaranteed.

As an example only, say a 7-year ARM started half a point lower than the fixed rate, at 6.9%. On the same $486,000 loan that is about $3,201 a month, roughly $164 less than the fixed payment, for seven years. Your actual quote will differ. I wrote a longer breakdown in my post on ARM vs. fixed rate in Nevada County.

The simple way I think about it: a buydown gives you a bigger break for a short time with a known rate afterward. An ARM gives you a smaller break for longer with an unknown rate afterward.

3 Questions to Ask Your Lender Before You Choose

1. What is my payment in year three, and in the worst case? For a buydown, the answer is the full note rate payment. For an ARM, ask for the rate cap, how much it can rise at the first adjustment, and the lifetime cap. Get the numbers in writing.
2. Who pays for the buydown, and what else could that money do? If a seller credit funds it, compare it with a price reduction or closing cost credit. Ask for the same loan quoted both ways.
3. Can I qualify at the full payment? Lenders often qualify buydown borrowers at the note rate, not the discounted rate. If you could not afford the year-three payment, a buydown only delays the problem.

Does a Buydown Make Sense in Today's Nevada County Market?

It can, because of how this market is behaving. My July data shows 396 active listings countywide, average days on market of 38, and an average list price of $747,899 against an average sale price of $607,801. Grass Valley homes averaged 76 days on market. When homes sit, sellers are more willing to talk about credits, and that is where a buydown becomes a real option rather than a headline.

A buydown tends to suit someone who expects their income to rise or plans to refinance if rates fall. An ARM can suit someone who is confident they will sell or refinance inside the fixed period. Neither suits a buyer who is already stretching to make the payment. For the full monthly picture with taxes and insurance, see my post on the real monthly cost of a Nevada County home, and you can browse what is available now on my Nevada County homes for sale page.

One more thing buyers overlook: neither option changes the price of the house. If a home is overpriced for what it is, a temporary payment cut just hides that for two years. I would rather help you negotiate a fair price first and then use credits or a buydown to improve the terms. A good lender will run each version side by side so you can compare the real cost, not just the first-year payment.

If you are thinking about buying or selling in Nevada County, I'd love to help. With 20+ years of experience and 200+ homes sold across Grass Valley, Nevada City, Lake of the Pines, and the surrounding Sierra Foothills, I know this market well. Reach out at (530) 489-4892 or visit sierrafoothillsrealestate.com/contact. I'm always happy to talk.