In today’s ever changing mortgage market, lenders of all sizes are continuing to evolve and offer different programs to help a buyer's ability to afford their new home. With the purchase market as competitive as it is, the 3-2-1 Buydown program offers relief to a prospective home buyer. There are many scenarios in which a mortgage lender may offer this program, but the most typical reasons are the seller of the home wants to incentivise the potential sale of their home, or the buyer expects to increase their incoming in the next few years, allowing them to save money for home remodeling, and renovations.
“Because a lot of people think that rates will be lower two years from now, it’s a good way, psychologically and economically, to get into a house at a start rate that’s lower than where rates are today,” Michael Isaacs of GO Mortgage said last week at the Mortgage Bankers Association’s annual conference. Even a hesitant buyer in today’s higher-rate environment can take advantage of the benefits with a temporary buydown mortgage.
This article is to provide the features available in the BankingBridge 3-2-1 buydown calculator. This calculator is available to mortgage lenders and can be easily installed into any website.
3-2-1 Mortgage Buydown
A 3-2-1 Mortgage Buydown is a type of purchase loan that will charge lower interest rates for the first three years, hence the “3.” In the first year, the interest rate is 3% less; in the second year, it’s 2% less; and in the third year, it’s 1% less. After that, the borrower pays the full interest rate for the remainder of the mortgage.
For example, with a 6%, 30-year mortgage, the interest rate would be 3% in year one, 4% in year two, 5% in year three, and 6% for the remaining 27 years. A 3-2-1 Mortgage Buydown requires a “Total Buydown Fee” which is calculated by the number of the years of the buydown, and the total principal and interest (P&I) savings each year. You then add up the total from these savings, and get to your total buydown fee. For easier convenience, BankingBridge has recently launched their new consumer-facing Buydown calculators for lenders and consumers alike to see how different temporary buydown programs may benefit the potential borrower.
How Does A 3-2-1 Buydown Really Work?
Let’s use our previous example of a borrower taking out a $300,000 loan with a 5% rate and a 3-2-1 mortgage buydown. Their principal and interest payments on the loan (P&I) are $1,611.00/mo, and the investor who purchases the loan in the secondary market from the lender will be contractually obligated to receive the full $1,610.00/mo payment.
So now in the first year of the mortgage, at 2% interest, the buyer will pay $1,109/mo out of their own pocket, and the remaining $509/mo will come out of the “temporary buydown” escrow account that is funded by the sellers at time of closing. So, $1109/mo from the buyer + $502 from the seller-funded buydown escrow account = $1611/mo to the investor in the secondary market. This will continue into year 2 and year 3 with the amounts from the buyer increasing, and the amount from the escrow account decreasing. Using the 3-2-1 buydown calculators from BankingBridge, the potential buyer is able to view different scenarios and the costs associated from years 1 through 3, and also years 4 through 30. Take a look below:
So, the $12,306 paid by the seller for the temporary 3-2-1 rate buydown will sit in an escrow account, and will be drawn against every month. None of the temporary buydown funds go to the lender, and 100% will be as a benefit to the buyer. In a purchase-driven market, a temporary buydown can be not only beneficial to a seller, but advantageous to the buyer as well.
While there are a few risks that should not be overlooked for potential buyers considering a 3-2-1, or any temporary buydown programs, the benefits in certain situations can be the difference in a potential home buyer’s journey. One of these “risks” is that the buyer may only focus on what their monthly payment is in year 1, or 2 at a greatly reduced interest rate, rather than consider the cost for years 4 - 30. On a more positive note, utilizing a 3-2-1 mortgage buydown can allow the buyer time for inflation, and potential increases in their income as they transition into years 4 or 5. If rates do drop, the buyer is always encouraged and can refinance their buydown loan.
If you're a mortgage lender, or looking to add the BankingBridge 3-2-1 Mortgage Buydown calculator onto your own website, contact BankingBridge here: https://www.bankingbridge.com/demo.