We’ve been corresponding with a mortgage broker via email, and one of the suggestions he made was a 3-2-1 temporary buydown that would enable us to obtain a lower interest rate. I’m not at all familiar with this term. Before I get back to him, I want to do a little self-education. Can you explain in plain English how a 3-2-1 buydown operates?
Fortunately, the Home Buying Institute uses plain English as our primary method of communication. I’ll try my best to make this topic understandable for you because I know it can be confusing. By the way, by inquiring about what you don’t know, you’re acting responsibly. One of the most crucial qualities a mortgage buyer can possess is this one. So kudos for that!.
The 3-2-1 Temporary Buydown Defined
By putting more money down at closing, you can lower the interest rate on the loan thanks to a mortgage buydown. In other words, it’s a method for paying more money at closing in order to lower the loan’s overall costs. There are two different types — temporary and permanent. The difference between them is pretty straightforward:
The 3-2-1 mortgage buydown works like this. In order to lower the interest rate over the first three years of the loan’s repayment term, you make a certain payment at closing. The rate will be 3% less than the permanent rate for the first year. It will be 2% lower for the following year than the note rate. And for the third year, it will be 1% less because, you guessed it,
Here’s an example:
Let’s say I apply for a mortgage loan and the lender informs me that, based on my credit score and other factors, I am eligible for a 6% interest rate. I expect to incur some additional costs during the first few years that I live in the house because I need to make some improvements to the building. I therefore want to lower my mortgage payments in those initial years.
In this case, I could achieve my short-term saving objective by using a 3-2-1 temporary mortgage buydown. I would therefore increase my closing costs a little. In return, I would lower the interest rate (and consequently, the sum of my monthly payments) for the first three years:
The bold green numbers above illustrate how much the rate is being reduced by the 3-2-1 designation. Thus, it is reduced in the first year by three full percentage points (from 6% to 3%) And so on, for the second and third years. Make sense?.
The interest rate would revert to the value the lender assigned during the initial application and approval process after the third year. In my example, that was 6% interest. Of course, the important thing here is to make sure that the money you spend to lower the rate does not exceed the money you will save during the first three years.
How does a 3-2-1 temporary mortgage buydown work is explained in this article. If you have any other queries regarding home loans or home buying, try using the search bar at the top of this website. You’re sure to find some helpful information on this site because there are hundreds of articles there. Good luck!.
What is a 3 2-1 buydown mortgage?
With a 3-2-1 buydown mortgage, the lender accepts an upfront payment in exchange for the borrower paying a lower interest rate for the first three years. In the first year, 3%, 2%, and 1% of the loan’s term, the interest rate is decreased. For instance, a 5% mortgage would only have a 2% first-year fee.
Are mortgage buydowns worth it?
Benefits of lowering your interest rate You will receive a lower rate on your mortgage loan regardless of your credit score, which is the main benefit of lowering interest rates. Lower rates can help you save money on your monthly payments as well as your overall interest costs for the loan’s duration.
How much does a 2-1 buydown typically cost?
Depending on the loan amount and interest rate, the price will change. The cost of the 2/1 buydown on a $300,000 loan with a 7% rate is $6,996, or 2. 33% of the loan amount. However, since a buydown prepays a portion of the payment for two years, there is no set percentage. Discount points are not used to lower the actual rate.
Does a 2-1 buydown require extra funds at closing?
Key Takeaways. In exchange for a one-time closing fee, a 2-1 buydown allows you to temporarily lower your interest rate for the first two years of homeownership.