Dwellings Colorado Logo

Understanding A 3-2-1 Buydown Mortgage

Knowledge is power, and this is especially true for home buyers in our current market. Working with an experienced Realtor is important for so many reasons, including them being able to refer you to a trusted lender. Right now buyers are having to get a bit creative when figuring out their mortgage. This has been brought on by higher interest rates. The good news is that there are some great options for buyers out there right now that can help save them hundreds of dollars with no fear of the current interest rates breaking the bank.

One option in particular that we want to highlight is the 3-2-1 Buydown Mortgage option. First and foremost, it’s important to note that this strategy not only benefits buyers but sellers as well. It’s a win-win.

So, what is it?

A 3-2-1 Buydown is a type of loan that starts out with a low interest rate that the buyer maintains for the first three years and then rises over the next few years until it reaches a fixed rate, in return for an extra up-front payment when purchasing the home.

This option reduces the buyers’ costs over the first few years and when the discount ends, buyers have the option to refinance if rates are lower at that time.

Here’s an example from rocketmortgage.com of what a 3-2-1 buydown could look like:

Let’s say a buyer wants to borrow $400,000 and qualifies for a 30-year fully amortized mortgage at an interest rate of 5%. The buyer decides they want to lower their interest rate for the first 3 years with a 3-2-1 buydown. In this scenario, the buyer would pay an interest rate of 2% the first year, 3% the second year and 4% the third year but would have to pay the full 5% from years 4 – 30.

It would look like this:

Year 1: Interest Rate = 2%, Monthly Payment = $1,478.48, Monthly Saving = $668.81, Annual Savings = $8,025.70

Year 2: Interest Rate = 3%, Monthly Payment = $1,686.42, Monthly Savings = $460.87, Annual Savings = $5,530.44

Year 3: Interest Rate = 4%, Monthly Payment = $1,909.66, Monthly Savings = $237.63, Annual Savings = $2,851.50

Remainder of Mortgage (years 4-30): Interest Rate = 5%, Monthly Payment = $2,147.29, Monthly & Annual Saving = $0

If this sounds like the right option for you and you’re ready to start your home search today, just reach out! We can get you in touch with a trusted lender and help you find the home of your dreams.

Share Post:

Copyright 2020 © Dwellings Colorado Real Estate Group