-
How Does 3-2-1 Buydowns Work
How does the 3-2-1 mortgage rate buydown work? Can you get seller concessions plus credit for 3-2-1 buydown on conventional loans and FHA loans?
-
1 Reply
-
A 3-2-1 buydown is a type of mortgage rate buydown plan that temporarily reduces the interest rate on a home loan, making the mortgage payments lower for the initial years of the loan. This can be particularly helpful for homebuyers who expect their incomes to rise over time, as it eases the initial financial burden of purchasing a home. Here’s how it generally works:
Structure of a 3-2-1 Buydown
- First Year: The interest rate is reduced by 3% below the note rate.
- Second Year: The interest rate is reduced by 2% below the note rate.
- Third Year: The interest rate is reduced by 1% below the note rate.
- Thereafter: From the fourth year onward, the interest rate reverts to the original note rate agreed upon at the time of the loan’s closing.
How It’s Funded
The buydown is typically funded by the home seller or the builder as an incentive to attract buyers. The seller or builder deposits the amount needed to subsidize the lower interest rates into an escrow account at closing. The mortgage lender then draws from this account to make up the difference between the reduced payment and what the payment would be at the original interest rate.
Benefits to the Buyer
- Lower Initial Payments: This buydown structure allows buyers to make lower payments in the first few years when other expenses may be higher, providing significant initial financial relief.
- Increased Affordability: Lower initial payments make it easier for buyers to qualify for a loan as the initial lower payments are considered when the lender assesses the buyer’s ability to pay.
Considerations
- Temporary Benefit: The reduction is only temporary, and buyers need to plan for higher payments once the buydown period ends.
- Cost to Seller/Builder: The seller or builder needs to provide the funds upfront, which they may include in the home price or recover through other means.
The 3-2-1 buydown can be a valuable tool for managing the initial costs of homebuying, but it requires understanding and planning for the financial changes that will occur once the buydown period is over. Buyers should assess their future financial situation and consider how they will handle the increased payments in later years.