Don't Be Spooked By Interest Rates!

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There Are Plenty of Options To Get Around A Higher Mortgage Payment. Let's Look At One Popular Option.

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3/2/1 Buydown. How does it work?

** Buydown defined. A buydown is a financing offer to reduce the buyer’s effective interest rate for the first 1, 2, or 3 years of their mortgage. Using a seller credit to establish an escrow account, it will subsidize the buyers’ monthly payment based on the difference in the interest rate. A 3/2/1 is 3 years, the 2/1 is 2 years, and no surprise, the 1/0 is 1 year. The rate reduction percentage is equal to the number of years left in the program.

** Where do I put it in the contract? A seller provides a seller concession in Section 4.2 of the Purchase Contract. That seller concession is an amount the lender would have provided to cover the buydown based on the terms of the loan. Ultimately, however, the buyer can use those concessions to aid in a permanent rate reduction, cover closing costs and prepaids, or use them to do a temporary rate reduction. Using the funds for a temporary rate reduction, in a rising interest rate market, gives the buyer the biggest monthly benefit in the short term.

** What happens if I don’t have enough seller credit? A buyer is allowed to fund their own temporary buydown. Now realistically that doesn’t make sense, however, if the seller credit is slightly short, a buyer can make up the difference.

** If I refinance do I lose the money? NO! That’s the best part. This credit stays with the buyer. Each month a little bit of the money in escrow subsidizes your mortgage payment per the program. If you refinance or pay off the loan, any money left in the escrow account goes back to borrower as a principal reduction.

Let’s go through an example.

If you put in an offer on a $655,000 home putting 10% down; so a $589,500 loan amount. Your rate per the lender is 6.50%

3/2/1 Buydown: The rate on the 30-year fixed will always be 6.50%.

The principal and interest (P&I) payment is $3,705.97. However, using the seller credit which is sitting in a lender escrow account; the monthly payment is lowered for the first 3 years.

Year one is effectively a 3.50% rate (a 3% discount) with a P&I payment of $2,639.42. A difference of $1,066.55/month.

Year two is effectively a 4.5% rate (a 2% discount) with a P&I payment of $2,975.75. A difference of $730.22/month.

Year three is effectively a 5.5% rate (a 1% discount) with a P&I payment of $3,331.85). A difference of $374.12/month.

To calculate the seller credit needed and savings to you over the three years, take each of the years monthly savings times 12 (to give an annual savings), then add the three years together.

If you would like to talk about other options, specifics on any of my listings or other homes, or have any other questions please call me at 469-556-1185. For even more information please use the Contact form below.