Understanding the 3-2-1 Mortgage Buy Down and How It Works
Are you a home seller or a home buyer looking for ways to save on your mortgage interest rates? If so, you may have come across the term "3-2-1 mortgage buy down" or "2-1 mortgage buy down." But what do these terms mean and how do they work? In this blog post, we will break down the concept of the 3-2-1 mortgage buy down and explain how to calculate the costs associated with it.
The 3-2-1 mortgage buy down is a strategy where the seller provides a seller credit to lower the buyer's interest rate for a fee. This means that the interest rate will be reduced for the first three years, then adjusted in the following years. Let's take a closer look at how it works with an example.
Assuming the current interest rate is 6.75%, a 3-2-1 buy down will reduce the rate by 3% in the first year, 2% in the second year, and 1% in the third year. After the third year, the rate will go back to the original rate for the remainder of the loan term, which is typically around 30 years.
For example, let's say you are buying a house for $500,000 without a down payment, and the seller is offering a 3-2-1 buy down. In the first year, the interest rate will drop from 6.75% to 3.75%, resulting in a monthly mortgage payment reduction of $927. In the second year, the rate will be 4.75%, with a monthly payment reduction of $634. In the third year, the rate will be 5.75%, with a monthly payment reduction of $325. Finally, in the fourth year, the rate will go back to the original rate of 6.75% with a monthly payment of $3,242.
For more details of the examples, I have made a short video that will explain it. Click the image to play it.
It's important to note that the 3-2-1 buy down can be costly for the seller, as they will need to pay for the buyer's reduced interest rate. In this example, the seller would need to pay a significant amount to cover the buy down. Alternatively, there is also a 2-1 buy down option, where the seller pays for a reduced interest rate for the first two years instead of three, resulting in lower costs for the seller.
Another option to consider is an adjustable-rate mortgage (ARM) with a fixed rate for a certain period of time, followed by an adjustable rate based on the current market rate. For example, a 7-1 ARM would have a fixed rate for the first seven years, followed by an adjustable rate based on the market rate after that. This can be another way to take advantage of lower interest rates in the short term, but it's important to carefully consider the risks and benefits of an ARM before choosing this option.
It's crucial to note that the information provided in this blog post is not intended as professional mortgage advice. It's always best to consult with a licensed mortgage professional to determine the best options for your specific situation.
In conclusion, the 3-2-1 mortgage buy down and the 2-1 mortgage buy down are strategies that can potentially lower your monthly mortgage payments for the first few years of your loan term. However, it's important to carefully consider the costs and benefits of these options and consult with a mortgage professional to determine the best strategy for your unique situation. If you're interested in exploring these options, feel free to reach out to us for assistance in connecting with a licensed mortgage professional.