Marry the House, Date the Rate
“Marry the House, Date the Rate”: Finding Creative Financing Solutions to buy when interest rates are up (like a 3-2-1 Buydown)
Just like when you marry someone, there are foundational things you need and then there are things you want, which often change. Similarly when buying a home, the purchase price is fixed, but interest rates change.
I was in an office meeting last week and an agent mentioned that 80+ groups of people attended their open house, another agent received 38 offers on a property, and homes are going way over asking.
All this activity is driving home prices up, and once interest rates come down, I can only assume demand will continue to increase as well as housing prices.
When speaking with clients, I have been suggesting that they speak with their lenders about finding creative financing options, such as the 3-2-1 buydown.
A 3-2-1 buydown is a temporary mortgage interest rate reduction strategy, which allows a buyer to qualify for a higher mortgage.
This approach lowers the interest rate for the first three years of the loan by 3% in the first year, 2% in the second year and 1% in the third year - then the rate goes back to the original rate for the remaining term of the loan.
This strategy is beneficial for homebuyers who are expecting interest rates to fall in the next few years and want to save money on their monthly payments in the meantime.
Here is an example of how a 3-2-1 buydown would work for a $1,000,000 home loan with a 5% down payment and an initial interest rate of 6.75%:
- Year 1: The interest rate would be reduced to 3.75%, resulting in a monthly payment of approximately $4,938. This is a savings of $1,762 per month compared to the original monthly payment of $6,700.
- Year 2: The interest rate would be increased to 4.75%, resulting in a monthly payment of approximately $5,494. This is still a savings of $1,206 per month compared to the original monthly payment of $6,700.
- Year 3: The interest rate would be increased to 5.75%, resulting in a monthly payment of approximately $6,082. This is still a savings of $618 per month compared to the original monthly payment of $6,700.
- Year 4 and beyond: The interest rate would revert to the original rate of 6.75%, resulting in a monthly payment of $6,700.
It is important to note that the 3- 2-1 buydown is typically paid for by the seller of the home (as opposed to a price reduction), or a lender and it is not available from all lenders.
Additionally, it is important to make sure that you can afford the monthly payments after the buydown period ends.
If you would like to learn more about this strategy, contact us via e-mail at
Team@greenesievers.com to schedule a time to meet. We can also put you in touch with a lender who can further explain the details of this approach.
