3-2-1 Mortgage Rate Buydowns (fixed rate, interest, real estate, lender)

[sierraAZ]

Has anybody used this type of buydown? Do lenders offer it? I've never heard of it before.

The most popular form of buydown in the 1980s was a "3-2-1" on a fixed rate 30 year mortgage. During year one of the new purchaser's mortgage, the seller agrees to pay 3 percentage points of the interest rate on the mortgage note. During the second year, the sellers pays 2 percent, and in year three the seller pays 1 percent. After that, the purchasers pay the full note rate.

To see how this works in practice, and why it can be a triple win -- for the seller, buyer and the realty agent -- consider this example. Say a seller has had her house on the market for months at $210,000 with no serious offers. She could cut the asking price, say to $200,000, to stimulate some bids. Or, more creatively, she could advertise a "3-2-1" buydown -- essentially subsidizing any qualified purchaser's mortgage payments during the first three years.

Here's how it would work, according to an active proponent, Joseph Lipes, president of Connecticut-based Family Choice Mortgage Corp., who ran the numbers for Realty Times. The sale would be for $210,000, not $200,000. Assume the going 30-year fixed mortgage rate is 6.5 percent. The purchaser applies for a 95 percent ($200,000) mortgage.

In year one, the purchaser's 6.5 percent rate would be subsidized down to 3.5 percent by the seller, creating a monthly payment of $898.09 for the purchaser, instead of the full $1,264.14 principal and interest. The seller's outlay for the subsidy would come to $366.05 a month, or $4,392.56 for the full year.

In year two, the purchaser would be paying at a 4.5 percent rate or $1,013.37 a month. The seller's contribution would be $250.77 per month or $3,009.20 over 12 months.

In the third year, the purchaser would be paying at a 5.5 percent rate, or $1,135.58. The seller would contribute $128.14 a month for a total of $1,542 for the year.

During the course of the three years, the home seller would pay a total of $8,999.44 in rate subsidies, according to Lipes. "So rather than have the sellers lower their sales price from $210,000 to $200,00" -- which might not strike potential purchasers as all that interesting -- "the sellers keep their price at $210,000 and pay $8,944.44 for the three year buydown," a savings of more than $1,000.

Realty Times - Real Estate News and Advice

[renriq02]

Yep..a lot of builders offer this...and it's offered through FHA.

You can have a rate of 5% the first year
6% the 2nd year
and 7% for the rest of the term

[sierraAZ]

Originally Posted by banker0679

Yep..a lot of builders offer this...and it's offered through FHA.

You can have a rate of 5% the first year
6% the 2nd year
and 7% for the rest of the term

Thank you. It's actually not a bad idea if possible, particularly if the rates stay low. I wasn't offered this option and didn't even know about it. Just stumbled across it today while doing more research because I wasn't particularly happy getting .25 rate reduction for 1.375 discount points (my other thread). So far based on my reading, the general opinion seems to be that 1 point should buy .25 reduction (permanent).

[renriq02]

well the 3-2-1 buydowns are different.

the reason they're not offered is that a lender will need to pay approx. 2.5% in discount points.

Your rate also depends on how low you're going...what is your rate with the 1.375 in discount points?

Originally Posted by sierraAZ

Thank you. It's actually not a bad idea if possible, particularly if the rates stay low. I wasn't offered this option and didn't even know about it. Just stumbled across it today while doing more research because I wasn't particularly happy getting .25 rate reduction for 1.375 discount points (my other thread). So far based on my reading, the general opinion seems to be that 1 point should buy .25 reduction (permanent).

[sierraAZ]

Originally Posted by banker0679

well the 3-2-1 buydowns are different.

the reason they're not offered is that a lender will need to pay approx. 2.5% in discount points.

Your rate also depends on how low you're going...what is your rate with the 1.375 in discount points?

That's what the deal is:

- About the discount points buying down the mortgage rate: I don't have my notes with me right now, but I recall getting the rate down by .25 on a 30-60 day lock was costing a few hundred dollars... perhaps $500-600 max. I'm really not sure off the top of my head, but it definitely wasn't more than 1K. This new person is telling me that 1.375 discount points = $1,985 will buy the rate down to 5.75% today, provided she quoted me 6% (so the rate is about the same today; nothing's changed considerably within the past two days) without paying discount points.

I just read that 1 discount point normally reduces the rate by .25. I think the first scenario (1st counselor) was even cheaper (have to doublecheck). 0.375 may not sound like much, but it's $745 I don't feel like throwing down the drain.

I have money leftover from the incentives worth 1.375 discount points. I'd be willing to pay the difference out of pocket to get this 3-2-1 deal because it sounds good in my circumstances. Even though I have no plans to move, life happens... and a permanent reduction of even teeny-tiny .25 takes over 7 years to break even.

[renriq02]

remember that the lender can charge you 2.5% or the builder will pay for it.

Most likely the borrower pays for it.

i will still suggest to shop around

Originally Posted by sierraAZ

That's what the deal is:

- About the discount points buying down the mortgage rate: I don't have my notes with me right now, but I recall getting the rate down by .25 on a 30-60 day lock was costing a few hundred dollars... perhaps $500-600 max. I'm really not sure off the top of my head, but it definitely wasn't more than 1K. This new person is telling me that 1.375 discount points = $1,985 will buy the rate down to 5.75% today, provided she quoted me 6% (so the rate is about the same today; nothing's changed considerably within the past two days) without paying discount points.

I just read that 1 discount point normally reduces the rate by .25. I think the first scenario (1st counselor) was even cheaper (have to doublecheck). 0.375 may not sound like much, but it's $745 I don't feel like throwing down the drain.

I have money leftover from the incentives worth 1.375 discount points. I'd be willing to pay the difference out of pocket to get this 3-2-1 deal because it sounds good in my circumstances. Even though I have no plans to move, life happens... and a permanent reduction of even teeny-tiny .25 takes over 7 years to break even.

[sierraAZ]

Originally Posted by banker0679

remember that the lender can charge you 2.5% or the builder will pay for it.

Most likely the borrower pays for it.

i will still suggest to shop around

I was saying that if a 3-2-1 buydown is available and it costs 2.5 points, I might be willing to pay the difference between 2.5 and 1.375 I have left over from the incentives after covering all other closing costs.