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Billee Silva: Hello, this is Billee Silva with the Southwest Florida Realty Show. Whether you’re a home buyer, home seller or have no interest at all in real estate, I think everyone today is aware of the rising interest rates because you can’t turn on the television or pick up a newspaper without hearing interest rates are the highest they’ve been in over 20 years and how it’s affecting the real estate market nationwide, not just here in Southwest Florida. Today I’m going to talk about a strategy that can help both buyers and sellers in high interest rate markets. Drum roll please.
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Billee Silva: There is a tool called a 3-2-1 mortgage buydown that can help potential homebuyers to buy a home in high-interest rate markets and give home sellers a way to entice buyers in challenging housing markets. But what is a 3-2-1 mortgage buy down you may ask? And how do they work?
Well, a 3-2-1 mortgage buydown is a strategy that can help reduce the initial interest rate on a home buyer's mortgage loan, making your monthly payments more affordable. It is similar to the practice of buying discount points on a mortgage in return for a lower interest rate, except that it's temporary.
When potential homebuyers are priced out of the market, they can try to get a 3-2-1 buydown mortgage. This type of mortgage reduces the loan interest for the first three years of the loan term. The initial rate will then be applied in the fourth year and continue for the life of the mortgage.
So, in the first year, the loan is reduced by 3%, by 2% in the second year, and 1% in the third year. Let me give you an example, if a homebuyer bought a home at a 7.76% mortgage rate in the first year of the loan, the rate would only be 4.76% the first year, 5.76% the second year, and 6.76% the third year.
The cost of a 3-2-1 buydown mortgage is the total amount that the buyer saves over the three-year period of lower rates.
Usually, this type of mortgage is used by sellers or home builders to help ease the costs for buyers. You may have noticed lately that some of the big home builders like Lennar, are advertising that if you purchase a spec home and close by a specific date they’ll give you this fantastic interest rate. Well, that’s what they’re doing, is a mortgage buy-down.
The savings experienced by the homebuyer in the first three years of a buydown mortgage term represent the cost of a 3-2-1 buydown mortgage. Rather than reduce the purchase price of the home, motivated sellers might be willing to pay the cost in order to attract buyers and close the deal.
One thing to note is buydown mortgages are only used for primary and secondary homes, not investment properties and the lender must still qualify the homebuyer at full interest rate before implementing this tool.
If you’re a potential homebuyer, it is essential to consider whether a 3-2-1 mortgage buydown makes sense for your situation. It’s important to realize if you want to use this financial option you must understand that in the fourth year, the mortgage will go up to its original rate so it’s essential to consider whether this option makes sense for your situation and evaluate your finances before closing to make sure you can afford it when the time comes.
It's always a good idea to speak with a mortgage broker and also your financial advisor to determine whether a 3-2-1 buydown is right for you.
As always, thank you for tuning in to today’s episode of the Southwest Florida Realty show, and make it a great day!
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