What is a 3/2/1 Buydown?
by April Vermillion, RE/MAX Alliance

No doubt you’ve been hearing the term 3/2/1 Buydown over the last few months. In a “flipped” market, it’s a strategy that can benefit both buyers and sellers.

So what is a 3/2/1 Buydown?
A mortgage buydown reduces the interest rate on the buyers’ loan for the first three years by offering additional cash upfront during the closing process. Not only will the Buydown reduce the buyers’ costs over the next few years, but if interest rates are lower when the discount ends, they can refinance.

Here’s How It Works

Let’s say a seller accepts a buyer’s offer to purchase their home at $655,000. The Buyer’s loan amount is *$589,500 (with a 10% down payment). So at a 6.5% interest rate, the monthly payment would be $3,700.

But with a 3/2/1 Buydown...
Year One (a 3% discount): At a 3.5% interest rate, the monthly payment is $2,600.
($3,700 – 2,600 = $1,100) x 12 = $13,200 in savings

Year Two (2% discount): 4.5% interest rate. Monthly payment is $3,000
($3,700 – 3,000) x 12 = $8,400 savings

Year Three (1% discount): 5.5% interest rate. Monthly payment is $3,300.
($3,700 – 3,300) x 12 = $4,800 savings

Cost to Seller: $26,400 (at the closing)
Savings to Buyer: $26,400 over the next three years with the possibility of refinancing to a lower rate.

*Numbers are rounded to the hundredth

Sellers, this is an excellent offer to entice buyers when you list your home. The more people touring your home, the less time it’ll spend on the market. This could protect you from dropping the asking price if the property takes longer to sell (which would most likely cost you more money than a buydown). Talk with your RE/MAX Alliance Agent to learn more.

Buyers, once you know your loan amount and lock in on an interest rate, you can calculate how much a 3/2/1 Buydown would save you. Of course, work with an excellent lender to determine the best discount for you. If you need a recommendation, your RE/MAX Alliance Agent will know several mortgage brokers you can choose from. You can also do a 2/1 Buydown, which is more secure and cost-effective than an ARM.

Sources: The Rueth Team and homebuyinginstitute.com

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