The 3-2-1 Buydown lets a homebuyer temporarily lower their interest rate over a 3-year period. This will reduce the interest rate by 3% for the first year. 2% in the second year. And 1% for the third year. After the third year, the rate goes back to normal. This way a homebuyer can slowly adjust to the normal rate while stashing their savings in escrow, in order to pay down the capital on their loan.
How a 3-2-1 Buydown Works
For the 3-2-1 Temporary Buydown to go into effect, it either must be provided by the seller as a concession, or the builder would need to make an up-front payment to the lender (yes, in many such cases it will be worth it, for both builder and seller keep reading to find out why) to fund the Buydown. In return, the borrower gets to pay a lower interest rate for the first 3 years of their mortgage.
Why The Seller Would Want to Pay
What incentive does the home seller have that would drive them to finance this up-front payment? Selling a house these days is becoming more difficult…because of interest rates! If a seller isn’t getting any offers on their house, but they’d prefer not to lower their price, yet still want to field a competitive offer, then covering the costs of the 3-2-1 Temporary Buydown is something they can use to make their price more attractive for a buyer.
Why The Builder Would Want to Pay
It’s no secret that one of the biggest barriers to purchasing a home is high-interest rates. Builders can attract more buyers and convince them to make the jump with an interest rate far lower than what anybody else is offering upfront. Financing the buydown gives builders a competitive edge in their market. They also would not have to go lower on their asking price, which is how they get their commissions.
Calculating 3-2-1 Temporary Buydown Loan Benefits
Take a look at the graphic below. Stare at it for a minute and everything will start clicking into place. Notice how much money one can save on a loan monthly, yearly, and overall, by lowering the interest payments for the first 3 years!
Something else to consider: after the first 3 years of the 3-2-1 Temporary Buydown are completed, and it’s time to make payments on the regular interest rate again, we recommend a buyer to *drumroll please* REFINANCE their loan to an even cheaper rate!
Meet a VA Home Loan Specialist
Have any questions? Interested in learning more about the 3-2-1 Temporary Buydown or have any other VA Loan questions? Visit us on our website to get in touch with us today. One of our friendly VA Home Loan Specialists will be happy to help you make the best decision for your situation!
