top of page
ambercano6

Interest Rate Buy Downs.... How do they work?

With our market changing we are starting to see interest rate buy downs. We see lender advertisements using the term 3-2-1 or 2-1. What does this mean? We interviewed a lender about this, and this is what we found....


These are considered temporary buy downs. They can be 3-2-1 or 2-1. The 2-1 will likely be offered over the 3-2-1. For a 3-2-1 buydown, the rate for the first year is 3% less than note rate. For the second year the rate is 2% less than note rate. The third year it is 1% less note rate. So if note rate for a 30 year fixed rate mortgage is 6.5%, the first year's payment will be based on a rate of 3.5%. Then 4.5% for year 2, and 5.5% for year 3.

Here is how the payments look based on a $500,000 loan amount:

Year 1 - $2245

Year 2 - $2533

Year 3 - $2838


For a 3-2-1, the full payment based on the 6.5% note rate is $3160. So the cost to the borrower is the difference between the full payment and the yearly discounted payments. So for year 1 that is $10,980. Year 2 is $7523 and Year 3 is $3856. Total cost is the sum of those 3 numbers - $22,358.


For a 2-1 Buydown, it works the same but only 2 years. Year 1 rate will be 2% less than note rate and year 2 will be 1% less. Using the above example again, total cost is $11,379.


What we have seen is the seller will offer to pay for the cost of the buy down in seller concessions. Depending on down payment, concessions can be limited to 3%. That is $19,500 for a $650K purchase price. So the cost of the 3-2-1 buydown exceeds the max concessions allowed. That is a reason many lenders do not offer a 3-2-1. But the 2-1 fits nicely.


Of course, please reach out to the lender you are working with to verify this information. If you need a referral to a lender, let us know! We have a lot of great lenders in our area.

3 views0 comments

Recent Posts

See All

Comments


bottom of page