What is a “3-2-1 Loan Buydown” and what are the benefits?
March 28, 2023 | Anthony Cosenza
There are misconceptions of what a 3-2-1 loan buydown is and what the benefits are for all parties
The 3-2-1 loan buydown program is a type of mortgage financing option that is designed to make homeownership more affordable for borrowers during the initial years of their loan.
Under this program, the borrower pays an additional fee upfront, which is used to lower the interest rate on the mortgage loan for the first three years of the loan. The interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. After the initial three-year period, the interest rate on the loan resets to the original rate and remains fixed for the remainder of the loan term.
The benefit of the 3-2-1 loan buydown program is that it can help borrowers qualify for a larger loan amount by reducing their monthly payments during the initial years of the loan. This can be especially helpful for borrowers who are stretching to afford the initial costs of homeownership, such as a down payment and closing costs.
However, it’s important to note that the borrower will be responsible for the full mortgage payment after the initial three-year period, which could be a significant increase from the reduced payments during the buydown period. Additionally, the borrower should carefully consider whether the upfront fee for the program is worth the savings on interest payments over the initial years of the loan.
This can be a good option, especially when the idea is to refinance a year or two down the road anyway. Most lending professionals believe that rates will be lower than the national average’s current 7% rate on 30-year fixed loans.
Regardless, this is a creative option for people to get into good homes in a market with limited inventory. Such is the case in this current real estate market, so more and more folks are exploring this with sellers who may be flexible with the asking of their home.
We’ve recently talked about luxury homes and the recent market impact on them. This 3-2-1 loan buydown should not be confused as a new version of the “new option ARM”, but an avenue that could make sense for some folks.