A 3-2-1 Buydown Mortgage is a type of adjustable-rate mortgage (ARM) where the interest rate is temporarily lowered through a buydown. With a 3-2-1 buydown, the interest rate on the loan is lowered by a set percentage for the first three years, then lowered by a smaller percentage for the next two years, and then returned to the fully indexed rate for the remaining life of the loan.
The interest rate buydown is typically financed by the lender, the builder or the developer, or a combination of the three. The buydown is usually financed by paying points upfront, which is then credited back to the borrower in the form of a lower interest rate.
The main advantage of a 3-2-1 buydown mortgage is that it can provide a lower interest rate and lower monthly payments in the short-term, which can make it easier for borrowers to qualify for a larger loan or a more expensive home.
However, it’s important to keep in mind that the interest rate on a 3-2-1 buydown mortgage can increase after the initial three-year period, which can make the monthly payments unaffordable for some borrowers. It’s also important to keep in mind that the interest rate on the loan can adjust based on an index, which is subject to market fluctuations.
It’s always recommended to consult with a mortgage professional or financial advisor to determine if a 3-2-1 buydown mortgage is the best option for you based on your unique financial situation and goals.
Pros and Cons of a 3-2-1 Buydown Mortgage
A 3-2-1 buydown mortgage is a type of adjustable-rate mortgage (ARM) that can provide lower interest rates and lower monthly payments in the short-term, but it also comes with some potential downsides. Here are some of the pros and cons of a 3-2-1 buydown mortgage:
- Lower interest rate: The interest rate on the loan is lowered by a set percentage for the first three years, making the monthly payments more affordable.
- Lower monthly payments: The lower interest rate can result in lower monthly payments.
- Opportunity to qualify for a larger loan: The lower monthly payments can make it easier for borrowers to qualify for a larger loan or a more expensive home.
- Interest rate risk: The interest rate on the loan can adjust based on an index, which is subject to market fluctuations. This can cause the interest rate and monthly payments to increase, which can make it unaffordable for some borrowers.
- Negative amortization risk: When the interest rate is adjusted and the new rate is higher than the old rate, the difference between the interest rate and the actual loan payment may be added to the loan balance, resulting in negative amortization.
- Limited benefit: The interest rate buydown is only temporary and only lasts for 5 years and after that, the interest rate will increase and the monthly payments will be higher.
It is important to keep in mind that a 3-2-1 buydown mortgage may be suitable for some borrowers, but not for others. It is always recommended to consult with a mortgage professional or financial advisor to determine if a 3-2-1 buydown mortgage is the best option for you based on your unique financial situation and goals.
Subsidized 3-2-1 Buydown Mortgages Examples :
A Subsidized 3-2-1 Buydown Mortgage is a type of 3-2-1 Buydown Mortgage where the interest rate buydown is financed by a government or non-profit agency, rather than the lender, builder or developer. The agency provides the funds to lower the interest rate, usually with the goal of making homeownership more affordable for low-income or first-time homebuyers.
Here are a few examples of subsidized 3-2-1 buydown mortgages:
- FHA-insured 3-2-1 Buydown Mortgages: The Federal Housing Administration (FHA) offers 3-2-1 buydown mortgages through its FHA Energy Efficient Mortgage program. This program allows borrowers to finance the cost of energy-efficient improvements to their home through a 3-2-1 buydown mortgage.
- Veterans Affairs (VA) 3-2-1 Buydown Mortgages: The Department of Veterans Affairs (VA) also offers 3-2-1 buydown mortgages to veterans and active-duty military personnel through its VA Energy Efficient Mortgage program.
- State and local government 3-2-1 Buydown Mortgages: Some state and local governments also offer 3-2-1 buydown mortgages to low-income or first-time homebuyers through their affordable housing programs.
It’s important to note that these programs are subject to change and availability and it’s recommended to check with the relevant agencies for the most current information.