Home prices are still at an all-time high, with mortgage rates north of seven percent. The current mortgage market is chaotic nationwide.
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 following sections, we will cover what a 3-2-1 buydown mortgage is and how it works.
What is a 3-2-1 Buydown Mortgage?
How The 3-2-1 Buydown Mortgage Work?
Here’s how it works, year, by year:
- * Year 1: Your mortgage payment is based on the note rate minus 3 percent.
- * Year 2: Your payment is based on the note rate minus 2 percent.
- * Year 3: Your payment is based on the note rate minus 1 percent.
- * Year 4. After: Your payment is based on the note rate.
Lets look at an example. If your mortgage note rate is 7.00 percent your payments could be:
- * Year 1: 4.00 percent
- * Year 2: 5.00 percent
- * Year 3: 6.00 percent
- * Year 4. After: 7.00 percent
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.
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?
Mortgage borrower benefits are pretty cool. These mortgage borrower benefits can include things like payments for the first three years. This can be a help, to buyers because it makes it easier for them to get used to owning a home. Mortgage borrower benefits may be useful when the person selling the house or the builder is the one who pays the cost. Mortgage borrower benefits can also be really attractive when interest rates are high. Another thing mortgage borrower benefits may help buyers keep some cash after the house is sold. Everything is finalized. Overall mortgage borrower benefits can make buying a home a lot manageable at the beginning. 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.
Risks of a 3-2-1 Buydown Mortgage
Here are some key things to consider: * Payment shock can happen after the three years of a 3-2-1 Buydown Mortgage. Borrowers often focus on the fact that their starting payment is lower with a 3-2-1 Buydown Mortgage. But the full note rate of the 3-2-1 Buydown Mortgage is what really matters in the long run. It is not guaranteed that borrowers will be able to refinance their 3-2-1 Buydown Mortgage later The value of homes and the interest rates may not get better. The buydown on a 3-2-1 Buydown Mortgage does not actually reduce the amount borrowed. Borrowers need to be prepared for the permanent payment, on their 3-2-1 Buydown 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.
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.
Lower Your Payment in the First Three Years
A 3-2-1 buydown mortgage can temporarily reduce your interest rate and monthly payment during the early years of homeownership.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.
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). 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 Gustan Cho at (800) 900-8569.
FAQs: What Is a 3-2-1 Buydown Mortgage?
What Is The Main Purpose Of A 3-2-1 Buydown Mortgage?
The main purpose of a 3-2-1 buydown mortgage is to lower the borrowers mortgage payment for the three years of the loan. This means the borrower will have payments at the start.
Does A 3-2-1 Buydown Lower The Interest Rate Permanently?
No it does not. A 3-2-1 buydown is only temporary. After the buydown period ends the borrower will pay the note rate.
Who Usually Pays For A 3-2-1 Buydown?
The seller or the builder or the lender usually pays for the 3-2-1 buydown. They do this through concessions or incentives.
Can A 3-2-1 Buydown Help Me Qualify For A Mortgage?
It might help a little with the payments.. Usually borrowers are qualified based on the full note rate, not just the temporary lower payment.
Is A 3-2-1 Buydown Than Discount Points?
Not always. A 3-2-1 buydown helps for a time but discount points can lower the rate for the whole loan. Which one is better depends on what the borrower wants how cash they have for closing what the seller is willing to do and how long they plan to keep the loan.
What Happens After Year Three Of A 3-2-1 Buydown?
After three years the borrower starts making payments based on the note rate for the rest of the loan. The 3-2-1 buydown mortgage payments will be higher, after this point.
A 3-2-1 buydown mortgage can help homebuyers have payments for the first three years.. These lower payments do not last. It is essential for borrowers to know the interest rate, how much their payments will increase and if they can still afford the payments when the buydown period is over. At Gustan Cho Associates borrowers can look at mortgage options like FHA, VA, USDA, conventional and non-QM loans, with experts who know the rules, automated underwriting results and lender requirements. If you have any questions about What Is a 3-2-1 Buydown Mortgage or you need to qualify for loans with a lender with no overlays, please contact us at 800-900-8569. Text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
