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Mortgage buydown is a mortgage loan option that allows a home buyer to get his or her interest payments temporarily reduced for the first few years of the loan repayment period in exchange for an up-front cash deposit. In case of the 3-2-1 mortgage buydown, the payments are decreased for the first three years. A mortgage buydown allows home buyers to qualify for mortgage loans they may not normally be eligible for. And, if the buyer is careful, he or she will be able to save money on the long run.
How 3-2-1 Mortgage Buydown Works
When a home buyer agrees to a 3-2-1 mortgage buydown, the mortgage lender must make a lump sum payment as soon as the loan agreement is signed. This payment is usually something the home buyer has to cover out of his or her own pocket. In some cases, the home seller may help cover the lump sum payment as a buyer incentive.
Once the mortgage loan agreement takes effect, the home buyer will start making the monthly payments. Those payments are made up of two parts - the principle and the interest. The principle as the portion of the mortgage itself, while the interest is essentially a fee lender pays to the lender for maintaining the loan.
In an ordinary fixed rate mortgage, the interest payments will remain the same until the mortgage loan is repaid. But if the mortgage includes a 3-2-1 buydown, the interest rates are temporary reduced for the first three years. The reductions get progressively smaller each year. The interest is reduced by 3 percent during the first year, 2 percent during the second year and 1 percent during the first year. After the three day period ends, it becomes an ordinary fixed rate mortgage.
How 3-2-1 Mortgage Buydown Benefits the Buyer
The 3-2-1 mortgage buydown allows home buyer to save money for the first three years. The payment structure allows buyer to set some money aside and use it towards making monthly payments as they increase. The fact that the rates remain fixed after the first three years give the home buyers a measure of financial security, allowing them to look at their monthly income and set aside enough money to make the monthly payments ahead of time.
How 3-2-1 Mortgage Buydown Benefits the Seller
In the wake of the collapse of the housing bubble, home sales hit historic lows, something which the real estate market is yet to fully recover from. Home sellers continue to have trouble finding buyers. Even if they do find buyers, those buyers may not be willing to pay enough to make the sale financially viable. As the result, sellers have come to increasingly rely on incentives to help them sell their homes.
The 3-2-1 mortgage buydown provides an incentive to prospective buyers, making that much more likely that one of them will buy the home. As mentioned above, the home seller can create further incentives by offering to cover a portion of the lump sum. While it will cost the home seller some of the profits, the money the home seller gets from the sale should be enough to cover that several times over.
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