What is a 3 2-1 buydown in real estate?
With a 3-2-1 buydown mortgage, the borrower pays a lower than normal interest rate over the first three years of the loan. The loan interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year; for example, a 5% mortgage would be just 2% in year one.
The downside for homebuyers is the risk that their income won't keep pace with those increasing mortgage payments. In that case, they might find themselves stretched too thin and even have to sell the home.
If interest rates are down in a few years and you want to refinance, you can do that whether you purchased a buydown or not. Plus, like we talked about earlier, those smaller payments you make over the first three years of a 3-2-1 buydown aren't a free gift—you pay for them.
The 3-2-1 buydown promotion is being offered US-wide on select homes in certain Brookfield Residential communities. We invite you to connect with our sales team for more information on the qualifying homes and neighborhoods.
In terms of cons, a 2-1 buydown does have a high upfront cost, and may only be worth it for the buyer if they can get the buydown via a seller concession. As a seller concession, the buydown becomes part of the closing costs that the seller pays to help the buyer by reducing their closing costs.
A 3-2-1 buydown mortgage can be a good deal for the homebuyer, particularly if someone else, such as the seller, is paying for it. However, buyers need to be reasonably certain that they'll be able to afford their mortgage payments once the full interest rate applies from the fourth year onward.
A 2-1 buydown allows homeowners to pay lower monthly payments during a time when interest rates are higher than future projections. A temporary buydown affords homeowners the luxury of lower payments while waiting for rates to come down for a potential refinance.
A 3-2-1 temporary buydown can reduce a homebuyer's interest rate for three years and will lower the rate by 3% the first year, 2% the second year and 1% the third year. After the third year, the rate will remain the same for the loan term.
If you are buying a home and have some extra cash to add to your down payment, you can consider buying down the rate. This would lower your payments going forward. This is a particularly good strategy if the seller is willing to pay some closing costs. Often, the process counts points under the seller-paid costs.
The expected decreasing inflationary pressure, plus the added impact of a falling federal funds rate in 2024, is likely to push mortgage rates lower. But while the Fed raised its benchmark rate fast in 2022–2023, it's expected to bring rates down at a much more gradual pace in 2024 and beyond.
What is the difference between 2-1 and 3 2-1 buydown?
A 2-1 buydown structure resembles a 3-2-1 structure. Instead of three years, the 2-1 curtails interests only for the first two years. Curtailed interests promote increased purchases, but they come with associated risks. The lenders are exposed to increased default risks.
Doing so lowers the overall amount of interest they pay over the mortgage term. This practice is sometimes called “buying down the interest rate.” Each point the borrower buys costs 1 percent of the mortgage amount. One point on a $300,000 mortgage would cost $3,000.
Borrowers can choose buydown plans with rates up to 3% lower than current mortgage rates. For example, if market rates are 5%, a 2-1 buydown would allow you to make payments on an initial rate of 3% for the first year.
Disposing of Buydown Funds
The funds should be credited to the total amount required to pay off the mortgage, or they may be returned to either the borrower or the lender as specified in the buydown agreement.
In lieu of taking a lower offer or making other concessions, a seller can offer a buydown, which will lower the buyer's monthly mortgage payment — either temporarily or permanently — making the purchase more attractive.
One option available is a seller-paid rate buydown, wherein sellers pay down points to lower the mortgage rate for purchasers. The upside to this: Buyers can pay a lower rate for a few years and sellers can avoid having to make a price reduction on the cost of the home.
Compass Mortgage's 2-1 buydown loan program requires a long-term, fixed-rate mortgage, such as a conventional, FHA or VA loan. The seller, builder or buyer must pay the up-front cost, which can either be in the form of a lump sum that is deposited into an escrow account or as mortgage points.
A 3-2-1 prepayment penalty, otherwise known as a 3 year stepdown prepayment penalty, charges a 3% fee on the outstanding principal loan balance if the loan is paid off in year 1, a 2% fee in year 2, and a 1% fee in year 3.
To subsidize the borrower's reduced monthly payments, it typically costs a percentage of the total loan amount to reduce the interest rate. For example, on a $500,000 loan with a 6% contracted interest rate, the total cost of the buydown for the first and second year would be about 2.2% of the loan amount.
A 2-1 buydown applies to most purchase loans, including conventional, FHA and VA loan programs. It does not apply, however, to refinance loans. To apply a 2-1 buydown to your loan, your mortgage also needs to have a fixed interest rate. A buydown cannot apply to adjustable rate mortgages (ARM).
Is it a bad idea to buy a house when interest rates are high?
No one likes it when interest rates go up, but it's not the end of the world. This is still a great time to buy a house—you'll just pay more than you would've a couple years ago. It's also a good time to sell a house. And if you already have a fixed-rate mortgage locked in, you're in good shape too.
Whether you should buy down your interest rate depends on the break-even point and the savings that come with it. Your break-even point is the number of years, months, or mortgage payments it will take before buying mortgage points is worth it.
Considering the fact that one mortgage point buys your mortgage rate down by 0.25%, if you want to buy down a full 1% on your mortgage rate, you'll need to purchase four points. Based on the example above, assuming a $344,800 mortgage, four discount points will cost you $13,792.
1) Interest-rate forecast.
We project the federal-funds rate target range to fall from 5.25% to 5.50% currently to 4.00% to 4.25% by the end of 2024, to 2.50% to 2.75% by the end of 2025, and to 1.75% to 2.00% by end of 2026, after which the Fed will be done cutting.
Here's where three experts predict mortgage rates are heading: Around 6% or below by Q1 2025: "Rates hit 8% towards the end of last year, and right now we are seeing rates closer to 6.875%," says Haymore. "By the first quarter of 2025, mortgage rates could potentially fall below the 6% threshold, or maybe even lower."
