Understanding a 3-2-1 Interest Rate Buydown
In challenging times with high-interest rates, buying a home might seem daunting, but there are advantages. Higher rates often mean:
- Less competition.
- Lower prices.
- Motivated sellers are often open to concessions.
This can include negotiation over closing costs and mortgage discount points.
This is where the 3-2-1 Interest Rate Buydown option comes into play.
What is a 3-2-1 Buydown
A 3-2-1 temporary buydown decreases your mortgage interest rate by 3 percentage points in the first year, 2 points in the second, and 1 point in the third, reverting to the original rate afterward.
For instance, with a 6% interest rate, a 3-2-1 buydown means 3% in year one, 4% in year two, and 5% in year three, ending at the agreed-upon 6% note rate. This program eases the impact of high rates, significantly reducing monthly payments.
It also frees up cash after purchasing a home, which can be helpful for post-purchase expenses like furniture or repairs.
How Can I Use the 3-2-1 Buydown?
Three years represents a significant span in the mortgage landscape. Witnessing the swift fluctuations in mortgage rates, the 3-2-1 buydown serves as a shield amidst the current interest rate surge and can serve as a stepping stone for potential refinancing after year 3.
Forecasting future 30-year fixed-rate mortgages remains uncertain. Nonetheless, even if rates soar, you retain the benefit of the initially secured mortgage rate. In essence, the 3-2-1 temporary buydown emerges as a beneficial strategy for homebuyers, regardless of market shifts.
The seller, homebuilder, or mortgage lender typically covers the cost of a 3-2-1 buydown.
What’s the Difference Between a 3-2-1 Temporary Buydown and Discount Points?
The temporary buydown offers substantial interest rate reductions for three years, whereas discount points offer smaller rate reductions, but for the life of the loan. Both have merits depending on how long you plan to stay in the home and your comfort with the locked-in interest rate.
Homebuyers can also consider combining the two. For example, let’s say the interest rate without paying points is 8%. The borrower can pay discount points to get the note rate down to 7%, assuming they have enough funds to do so. Then, if they are taking advantage of the 3-2-1 temporary buydown, the rate reductions in the first 3 years would be based on the note rate of 7% (4% in year 1, 5% in year 2, 6% in year 3 and the note rate of 7% in year 4 and beyond).
Navigating these options is crucial, and our team at US Lending Company is here to guide you through these decisions.
If this situation resonates with you, we’re here to assist!
Reach out to one of our trusted US Lending Company Loan Advisors today to discuss your options.