3-2-1 Buydown Home Loan Program
The prospect of saving money when financing a new home is understandably attractive for many buyers, and West Town Team is here to help you figure out which option is best for you. The 3-2-1 buydown is one of the many different products available that can save you money over time while also allowing you to adjust to your initial mortgage rate. At the cost of a one time upfront fee to the lender, a 3-2-1 buydown has you pay a lower interest rate over the first three years of your mortgage before reverting to its initial rate.
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Michael Samm | Keller Williams Realty Chicago
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Michael Samm | 312-767-7504
Keller Williams Realtor Chicago
What is a Buydown?
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Buydowns are a kind of mortgage financing technique that enables homebuyers to pay a lower interest rate over a variable period of years of your loan after first paying an extra upfront fee. Mortgage interest rates vary from year to year, reaching historic highs in 1981 at 16.63% and lows like 2.68% in 2020. As of 2022, the average interest rate is 7%, representing a 4% increase over the average rate of 2021. The upfront cost of the buydown can be paid by either the homebuyer or borrower, or by the seller. It's not uncommon for the seller to cover the upfront cost of the 3-2-1 buydown in the form of seller credit in order to make their property more attractive to buyers. Businesses that relocate their workers also occasionally cover the cost of the buydown in order to help lighten the cost when they have employees relocate to a new city. There's no standard fee for a buydown. If you're interested in a 3-2-1 buydown, you'll want to discuss your options with your lender.
When you choose a 3-2-1 buydown, your loan's interest rate is lowered by 3% during the first year, 2% the second, and 1% the third. Once this three-year period ends, your loan's permanent rate kicks in for the remaining life of your loan. For example, if your loan's interest rate was the 2022 average of 7%, you'd pay a 4% interest rate for the first year of your loan, then 5% the second, and 6% the third. After the buydown period ends, you begin paying the initial 7% interest rate. As you can see, a 3-2-1 buydown helps you save more money over time, especially if you aren't responsible for paying the upfront cost yourself. It should be noted, however, that 3-2-1 buydowns are not available for investment properties. They are also not available as part of an adjustable-rate mortgage (ARM) with initial periods of less than five years.
3-2-1 Buydown Key Takeaways
Even if you choose to pursue a 3-2-1 buydown, you must still be approved for your loan's initial rate rather than the discounted one offered by the buydown. Buydowns are generally great options if you have a lot of cash upfront or if the seller or lender will be covering the upfront cost because of how a 3-2-1 buydown empowers you to save more money that can go towards home repairs or renovations before you're expected to pay the initial rate. A 3-2-1 buydown is typically a better choice for people who plan to live in their new home for a longer period of time than those who are likely to move on quickly. One of the most attractive things about the 3-2-1 buydown is the ability for homebuyers to get accustomed to their new home before being expected to pay the non-discounted mortgage payment.
Discuss the Possibility of a 3-2-1 Buydown with West Town Team
The West Town Team is available to discuss your home buying options and will endeavor to help you discover the most cost-effective means of buying a new home.
