In this blog, we will cover what a 3-2-1 buydown mortgage is. We will also discuss the differences between a 3-2-1 buydown mortgage versus what is the qualifying mortgage interest rate on a 2-1 buydown mortgage. Home prices are still at an all-time high, with mortgage rates north of seven percent. The current mortgage market is very chaotic throughout the nation.
Gustan Cho Associates is helping our clients navigate these muddy waters. Since these times are unprecedented, mortgage investors are getting creative with ways to help borrowers afford to buy a home.
Our team of highly skilled mortgage professionals is here to educate our readers on tips and tricks to navigate the difficult market. In this blog, we will talk about interest rate buydown processes. There are a few different buydown processes to choose from. We will detail these processes now. In the followng sections, we will cover what a 3-2-1 buydown mortgage is and how it works.
What is a 3-2-1 Buydown Mortgage?
First, you must understand what a buydown process means. Buying down your interest rate can work in many ways. Many of our readers are familiar with investing in discount points to receive a lower interest rate for a mortgage loan. This is a process in which a mortgage borrower will pay the lender money in advance to receive a lower interest rate throughout the life of the loan.
What Are Mortgage Discount Points?
With discount points, you are effectively paying the prepaid lender interest in advance to pay lower interest in the life of the loan. Depending on how long you plan on staying on your mortgage loan, this can be a great investment and save you thousands of dollars in total interest paid. A lender offering discount points is taking a gamble that you will only stay in the mortgage for part of the loan term.
Most of the time, we want to ensure your investment in discount points will pay for itself in the first five years of a mortgage loan.
Statistically speaking, an American citizen is on a mortgage loan for approximately five and a half years. Of course, depending on your situation, that can vary. Especially in today’s high-interest rate environment, most home buyers will refinance their mortgage in the upcoming years.
How Much Are Discount Points?
78% of analysts expect mortgage rates to decrease in the next six to 18 months. Since there is no formula to calculate the discount points cost, contact our Gustan Cho Associates team today to discuss your situation. Discount points fluctuate with interest rates and market conditions on a minute-to-minute basis. That said, a licensed loan officer on our team can walk you through current interest rates and get a quote in your state.
How Does Mortgage Rate Buydown With Discount Points Work?
A newer process in mortgage lending is called the rate buydown process. This process is not brand new. It is recently back in practice because of the rising interest rates across the board. If you have shopped for a major purchase in the past few months, you know interest rates are through the roof. While the goal of the interest rate hikes is for a noble cause, reducing inflation across the country, it is making it very difficult for the average American to afford to buy a home. With higher interest rates and home values historically high, this is a perfect storm for slowing down the housing market.
Buying a New Home In Today’s Economic Climate
As values may decrease slightly, the savings are instantly wiped out based on today’s interest rates. Even in today’s real estate climate, buying a home can still put you in a better position than renting. A mortgage can lock you into a fixed interest rate today, and you will be able to refinance in the future when rates eventually drop. One thing to consider if you continue to rent is that your landlord can raise your rent every year you are there. For more information on the advantages of buying a home versus renting a home, please call our team today!
3-2-1 Buydown Mortgage
We will now discuss the interest rate buydown process and how it works. The interest rate buydown process is complicated to explain. The process works by temporarily buying down your interest rate for several years when purchasing a home. The most aggressive buydown process is the 3-2-1 buydown mortgage. In simplest terms, your interest rate is reduced by 3% for the first year of your loan, 2% for the second year of your loan, and 1% for the third year of your loan. Then your interest rate goes to the normal locked-in interest rate agreed upon when closing your mortgage.
Case Scenario of the 3-2-1 Buydown Mortgage
Example. Let’s say you qualify for a 7.5% 30-year fixed mortgage in today’s rate environment. When using the 3-2-1 buydown, your rate will be 4.5% for the first year, 5.5% for the second year, and 6.5% for the third year. Then, you will pay the full 7.5% for years four through thirty. While you will save money, the interest rate by the down process will not increase your buying power on a home. For mortgage qualifications, you must qualify based on the highest interest rate before the buydown begins.
Who Pays For The 3-2-1 Buydown Mortgage?
Another thing to consider is that the home seller must pay your interest rate buydown portion. While a borrower can pay the buydown amount, it does not make financial sense to do so. If you are going to buy the interest rate down yourself, financially, an underwriter would rather see you budget your money accordingly and qualify for the higher payment for the life of the loan. When a seller pays your interest rate buydown, they are essentially prepaying interest as a credit to you. This closing cost credit will count towards the seller-paid closing costs and concessions.
Is a 3-2-1 Buydown Mortgage Right For Me?
The funds from the seller are put into a separate “escrow” account, and each month, a portion is drawn from that account to make your payment in full. The interest you save each month is drawn from that “escrow” account. Every agency has a specific closing cost concession threshold that must be considered.
Examples of Subsidized 3-2-1 Buydown Mortgages
The best example is that an FHA loan will allow a 6% seller concession, and a conventional loan will only allow a maximum of a 3% seller concession (in most scenarios). It is important to understand that the 3-2-1 buydown is the most aggressive option, which is also the most costly option. With a conventional loan, it may not be possible to utilize the full 3-2-1 buydown, as the concessions may cost more than 3%. Contact a licensed loan officer at Gustan Cho Associates to review your specific rate buydown costs.
Types of Interest Buydown Mortgage Options
In a scenario where the 3-2-1 buydown is too aggressive and the seller is unwilling to pay, we still have other options available. The most common buydown in today’s mortgage climate is the 2 to 1 buydown process. Similar to the 3-2-1 buydown, this program will increase your interest rate for the first two years of your mortgage loan. In the example of a 2-to-1 buydown, your interest rate is reduced by 2% for the first year of your mortgage.
How Does The 3-2-1 Buydown Mortgage Work in the Second Year?
In the second year of your mortgage, your interest rate is reduced by 1%, starting on the third year of your mortgage loan. Your interest rate goes back to the normal agreed-upon amount. Example. Using the same figures from the example above, you qualify for a 7.5% 30-year fixed mortgage.
How Does The 3-2-1 Buydown Mortgage Benefit Homebuyers?
When using the 2-to-1 buydown, your rate will be 5.5% for the first year, 6.5% for the second year, then for years three through thirty, you will pay the full 7.5%. Once again, the seller must pay the cost associated with the buydown as a closing cost credit. The number of concessions required will be lower than the 3-2-1 but still pretty substantial.
What Is a Single-Year Buydown Mortgage?
One more buydown option is available to help potential buyers enter the mortgage market. The last option is a single-year buydown. For the first year of your mortgage, your interest rate will be reduced by 1%. The interest rate returns to the agreed-upon amount in the second year of your mortgage. While there is still considerable savings here, This is a last-ditch effort in many contract negotiations. To stay consistent with our previous examples, you qualify for a 7.5% 30-year fixed mortgage. When using the single buydown, your rate will be 6.5% for the first year, then for years two through thirty. You will pay the full 7.5%.
How The 3-2-1 Buydown Mortgage Help Sellers Sell Homes Faster
To utilize a rate buydown, the sellers must agree to the exact cost of the buydown. Your real estate agent must state in the contract that you are receiving seller concessions that will be applied toward a rate buydown. Our team of mortgage experts is here to help your realtor with the exact verbiage needed on the contract to utilize this money-saving process.
As the housing market cools off, many sellers are becoming more motivated to sell their homes and offer seller concessions. Utilizing those concessions to lower your monthly payment helps in these times of inflation.
Starting with a low payment and progressively stepping up to your regular payment can help with the current costs of everyday items, such as utilities, gasoline, and groceries. In some cases, like when using an FHA loan, you may get additional concessions above and beyond the rate buydown.
Using Seller Concessions For 3-2-1 Buydown Mortgage
If you are lucky enough to negotiate the full 6%, you will likely have extra concessions that can go towards other closing costs on your mortgage loan. Remember that you will still need to fulfill your minimum investment requirement of 3.5% of the home’s purchase price (assuming a credit score of 580 or higher).
Understanding How The 3-2-1 Buydown Mortgage Work?
Gustan Cho Associates understands that the mortgage process could be clearer. Adding additional information and criteria, such as a rate buydown, can further muddy the waters. Our team of highly skilled experts is available seven days a week and even in the evenings. We understand you have a busy work-life schedule, and we staff accordingly.
The Best Lenders With No Overlays and Best Mortgage Rates
Gustan Cho Associates are mortgage brokers licensed in 48 states, including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The team at Gustan Cho Associates specializes in one-off scenarios and manual underwriting.
Gustan Cho Associates’s mortgage experts encourage you to check our reviews and shop for the best mortgage available. We have access to some of the industry’s lowest interest rates and most aggressive mortgage programs. We do not have additional lender overlays and are here to assist our clients through the loan process. For more information on the buydown process, please contact Mike Gracz at (800) 900-8569.