What is a 3-2-1 Buydown? The PROS & CONS
Hey everyone, Lets get into what a Temporary Buydown on a home loan is….
What is a Temporary buydown on a home loan?
The 3-2-1, 2-1, 1-1, 1-0 buy down has been around for many years but most recently its become very popular, and will likely continue to be popular through 2023. The temporary buydown is exactly what it is, it temporarily buys down your interest rate, this buydown option will likely only be popular until rates drop a bit more. But for now its great, and helping buyers get payments that their comfortable with.
I'm gonna go through examples to help you understand the Temporary buydown in great detail, so I'll be explaining this by using an actual temporary buydown calculator so you can see each buydown option and the costs associated with them…
So I was curious what people are finding online, this is what I found on google…it's a brief explanation.–A temporary buydown is when a party in a mortgage transaction pays a lump sum in order to reduce the interest rate temporarily for early years of the loan…….ahh okay, that's exactly what it is but I'll breakdown..
And before I get into it: I appreciate you taking the time to learn…My name is Alex, and if you would like to schedule a time to talk to me please schedule at this link https://calendly.com/alexrehlusa/15min
Okay, Here go: Watch this example https://youtu.be/yofSrCxpNjM
This is basically a feature that is added to your home loan that allows you to temporarily reduce your rate anywhere from 1-3 years. This is not a variable rate or an adjustable rate mortgage. Your Note Rate is still fixed on whatever term you chose.
Okay, So where does the money go for the Temporary buydown. The money goes into an escrow account that is managed by the loan servicer, those additional funds are spread out evenly between the 1-3 years of the temporary buydown period to make up the difference of the payment.
Okay here's some bonus info: For example: lets say youre 1 year into your 2-1 buydown and if interest rates drop so much that you want to refinance to a lower rate, the additional funds left in your buydown escrow account will be used to paydown the principal of your loan on your refinance.
also have links in the description of my youtube video that you can go to if you would like to schedule a 1on1 call with me. https://calendly.com/alexrehlusa/15min
get into the Pro's & Cons:
I wasn't a big fan of these buydowns initially but It's helped many of my customers get into homes and they're all fans of it. But I'll let YOU decide on your own though.
The Pro's for the Temporary buydown:
-Lower payments for 1 to 3 years that is comfortable for you
-It can help free Up cash in the initial year or years of the lower payments
-Peace of mind easing into your mortgage payment over time
-You can leverage this to negotiate with the seller for your offer to get accepted since there are less offers on homes in this market, more than likely the seller will be giving a seller credit to pay for the buy down, this is a win win for all parties.
-Lower payments are short term, if you don't manage your finances well then this can be an issue in the future
-If market conditions don't improve then the borrower cannot refinance to improve their note rate after the temporary buydown period
-Borrower is qualified based off the NOTE rate not the temporary buydown rate
When it comes to the Temporary buydown, its going to be best to consult with your Loan officer (or me) and see what will fit your finances, lifestyle, and goals best……
Thank you for sticking around and watching my video. I hope it was very helpful for you or maybe someone you know.
Thank you again, don't forget to e-mail me and let me know what your thoughts are on temporary buydowns, and you can also Subscribe to my channel so you don't miss anything else in the future.