What is a 3-2-1 Temporary Rate Buy Down?
This article is a free resource in the Home Buyer University course offered by Life & Legacy Properties.
Temporary rate buy-downs are a secret mortgage hack that provides buyers the short-term relief they need while keeping more money in the sellers’ pocket.
Here’s how they work…
It’s as easy as … 3-2-1
In a 3-2-1 temporary rate buy down, the seller of a home credits the buyer money to put toward their monthly payment for the first three years of homeownership.
This money is paid in a lump sum by the seller at the time of closing, has an assigned purpose, and is distributed by the lender toward the buyer’s loan payment on a scheduled basis.
Let’s assume a buyer buys a home and has a 7.2% interest rate:
In the first year of the mortgage, the seller pays for 3% of the buyer’s interest rate.
For the first year, the buyer has a monthly payment the equivalent of a 4.25% rate (because the seller has paid for the remaining 3% in up front money paid at the time of sale).
In the second year of the mortgage, the seller pays for 2% of the of the buyer’s interest rate.
This means the buyer’s payment increases from the equivalent of 4.25% to 5.25%.
In the third year of the mortgage, the seller pays for 1% of the of the buyer’s interest rate.
This means the buyer’s payment increases from the equivalent of 5.25% to 6.25%.
Starting in year four, there are no remaining funds from the seller, so the buyer begins making monthly payments at the full 7.25% interest rate amount.
Example
Why would anyone do this?
Advantage to Sellers
The advantage for sellers is that they can offer buyers SIGNIFICANT temporary monthly savings at a cost that is LESS than reducing their price.
In the case of the illustration above, a seller can still sell their home for $280,000 while offering a buyer a first year monthly payment option that’s the equivalent of a $77,000 price reduction.
The second year payment is like a $53,000 price reduction, and the third year payment is like a $28,000 price reduction.
The cost to seller is less than $12,000.
Advantage to Buyers
Still referencing the illustration above ($280,000 condo purchase with 10% downpayment and a 7.25% interest rate), a buyer can now ease into their new full monthly payment.
Year one monthly savings - $480/mo
Year two monthly savings - $327/mo
Year three monthly savings - $167/mo
This three year on-ramp allows a buyer to earn more money through career advancement, combining incomes with a spouse or partner, or finish paying off debt in years 1-3 that they can conveniently reallocate later to their monthly mortgage payment.
In some cases, interest rates might also drop during those three years, thus allowing the buyer to refinance into a lower rate that continues monthly payment savings long after the first three years are up.
Note: Temporary buy downs for one and two years can also be utilized. They follow the same model above.
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