The FHA 2-1 Buy Down program can be a good purchase finance strategy, particularly on new home sales. As a rule, a developer does not want to discount the purchase price. Reducing the purchase price not only affects your purchase, but all future purchases. The reduced sales price becomes a comparable sale likely to be used by the appraisers on future sales.
Many developers are willing to contribute toward closing costs or buying down the interest rate rather than discounting the price. With a FHA 2-1 buy down, the seller would be buying your rate down 2% the first year and 1% the second. If you are financing $250,000 and the current interest rate was 5%, the principle and interest payment would be $1342. Using the FHA 2-1 buy down strategy, your interest the first year would be reduced to 3% and the principle and interest payment would drop to $1,054 saving you $288 per month for the first 12 months. The interest rate the second year would increase to 4% and the principle and interest payment would be $1,193. The interest rate would adjust to the 5% note rate and $1,342 principle and interest payment at the beginning of the 3rd. year and remain there for the remaining 28 years of the loan.
The beauty of this program is it reduces payment shock for first time homebuyers. As a new homeowner, you probably want to buy some furniture or do some landscaping. This program will free up funds for some of the expenses associated with purchasing a new home.