What is a 3-2-1 Buydown Mortgage

There is a phrase buzzing around the real estate industry: “Date the rate and marry the home.” While this is logical, there is an underlying assumption that the mortgage rates will get better and that the buyer will qualify down the road to refinance their home. I personally believe the odds are in my favor that the rates over the next 10 years will be better than they are now. We are at record levels right now. I have also looked at rates since 2000, and that supports my opinion too. I believe at least one of the following two things should happen to make this theory work.

The first option is that a buyer should negotiate for all of their closing and escrow costs to be paid for by the seller, which would include the funds to cover the 3-2-1 buydown.

Just to set the right expectation, the rate is the same for all 30 years.

For example, we will make up a scenario here, saying that the buyer’s mortgage rate today is 7%

In Year 1, the buyer pays the interest based on a 4% rate, and the seller concessions cover the remaining 7% interest for that year, which is 3%.

In Year 2, the buyer pays the interest based on a 5% rate, and the seller concessions cover the remaining 7% interest for that year, which is 2%.

In Year 3, the buyer pays the interest based on a 6% rate, and the seller concessions cover the remaining 7% interest for that year, which is 1%.

In order to make this work, funds will need to be used toward it. The lender will tell us how much we need to ask the seller for in concessions. Then we will try to get this covered by the seller. With this assumption, we put the seller concessions we get for the 3-2-1 program into an escrow account and use the money every month to pay a portion of the buyer’s mortgage. If the buyer sells or refinances within three years, the portion not used from the escrow account can be applied toward the buyer’s closing and escrow costs.

The next option is to negotiate the purchase price to reflect either a VA, USDA, FHA, or a 95% loan-to-value conventional mortgage that matches the home’s rent payment. This is an option because I think the market will probably reopen once tenants can choose between paying the landlord and paying their mortgage if the payments are about the same.

The rent vs. owning conversation has been around for a very long time. Do I rent and make my landlord rich, or do I own and fix my payment minus the adjustable items like insurance, tax, HOA, etc.? Finally, as I get older, do I want to keep paying rent or have a home paid off, as well as the other benefits that come with owning? The owner, not the renter, is responsible for keeping the house in good condition.

We are here to help our client relationships make the best sense out of any real estate market we are in. The market is like the ocean: the tide is coming in, it is in, it is going out, it is out, and it repeats itself in theory. While our last boom and bust was about loans and speculations, and this one is based on supply restraints and the Fed increasing rates drastically, they both have an increase and decrease, and then a rebirth of the excitement of real estate.

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This is not financial or real estate advice nor is intended to replace the advice of a licensed loan officer.