What is a 3:2 buy down:
A 3:2 buydown, also known as a “3-2 buydown” or a “3-2-1 buydown”, is a financial tool used to help homebuyers reduce their monthly mortgage payments. It is a low-risk, low-cost way for buyers to lower the amount of interest they pay in the early years of the loan.
How does it work:
The 3:2 buydown works by paying upfront fees, which are used to temporarily buy down the interest rate for the first three years of the loan. The interest rate for the remaining years of the loan remains unchanged. This way, the buyer can save money in the short term, as the lower rate applies for the first three years of the loan.
Who pays the fees:
The upfront fees are typically paid by the seller or the homebuyer. The amount of the fee depends on how much the buyer wishes to lower the interest rate. The lower the rate, the higher the fee. For example, if the buyer wants to lower the rate by 1%, the fee can range from 1-3% of the loan amount.
The seller paying the upfront fees, sweet right?!! We’re loving all the buyer advantages still out in the market right now!
Other associated costs to the loan:
In addition to the upfront fees, the buyer also has to pay closing costs, which include the title insurance and other charges. These costs can range from 0.5-2% of the loan amount.
Yeah, we can’t get out of all transaction fees, but we’re seeing lots of seller concessions that can help cover closing costs and title fees!!
Weighing the pros and cons of a 3:2 buy down:
When considering a 3:2 buydown, it is important to look at the long-term savings. The lower rate in the first three years of the loan will result in lower monthly payments. This can make the loan more affordable for buyers who may be on a tight budget.
However, it is important to remember that the lower rate only applies for the first three years of the loan. After that, the interest rate will revert back to the original rate, which may be higher than the market rate at that time. This means that the buyer could end up paying more in interest than they would have without the buydown.