3-2-1 mortgage buy-down PROS and CONS - YouTube

You can save $600 per month during the first year of this mortgage.

What in the world is a 3-2-1 buydown mortgage?

In this video I'm going to go over the pros and cons.

The good, the bad and ugly and tell you things you probably don't

see or hear in the marketing material for a 3-2-1 buydown

All right, Matt, the mortgage guy residential mortgage

broker, licensed in 48 states over at UMortgage.

Reach out to me and my team.

If you're looking to get pre-qualified we're happy to help.

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Fill out the form. Let us know where you're at, how we can help.

Let me fix that. Pre-approved.

No such thing as pre-qualified.

We're only going to do pre-approval.

So on with the show. 3-2-1 buydown.

This things getting more and more attention.

I'm seeing more and more about it.

So I want to just give you the skinny how I always do.

Because when somebody is promoting a program

or there's marketing about a program, it's all sunshine and rainbows.

It's all good.

But like most things, there's pros and there's definitely cons.

When it comes to a 3-2-1 buydown mortgage.

There's also a 2-1 buydown similar type thing.

Let me start there.

What is a 3-2-1 buydown mortgage?

A 3-2-1 buydown mortgage is a type of loan

that change the charges, lower interest rates for the first three years.

That 3-2-1 1 is the first three years of the mortgage

where 3% less interest in the first year, then 2% the following year.

Then 1% lower the year after.

I'll give you an example. Right.

So let's say it's a 30 year mortgage and that the start rate is 5%, but

they give you 2% during the first year, 3% during year

two, 4% during year three.

And then starting in the fourth year and beyond,

it goes to that 5%, which is the quote unquote start rate.

Let's let's talk about some pros and cons.

The pros, obviously, is that you're going

to have a cheaper payment for the first few years.

And just to put some context to it, because people, you know,

you can talk all these numbers, it doesn't mean as much.

$400,000 purchase, 10% down.

Taxes, insurance, mortgage insurance, all in payment at a 5% interest rate.

$2,476 per month.

Now with a 3-2 buydown,

if that 5% was the start rate

and so you got 2% in year one.

That year one payment would only be $1,874,

which is, you know, like I opened the video, a $600 a month savings.

Pretty spectacular.

Year two, when it goes up to 3%, you're paying $2,061 per month.

Year three, you're paying $2,262.

And then year four and beyond, $2,476 at 5%.

Now, those are the pros.

Is it your payment is lower for the first few years?

You get to ease into this $2,476 payment by starting lower

and then letting it kind of ladder up over the years.

Sounds absolutely amazing.

And here's where the marketing stops and the truth begins right now.

Let's transition into cons.

Cons of this mortgage are first and foremost, it ain't free.

They're not just giving you this for free.

It comes with an upfront cost.

And for all intents and purposes,

you can treat this

upfront cost as prepay paying

that interest that you're not paying in those first three years.

That's literally what the companies do, right, is

they're going to make

5000 less in interest the first year and 3000 less in interest

the second year and 2000 less interest the third year, whatever those numbers are

and they lump it least that amount

into an upfront cost, meaning that you're paying it right.

You're not paying it monthly, you're paying it right now upfront.

And so it's a it's a big upfront cost.

10,000, 12,000, 15,000, depending on the size of the loan.

Right.

So that is a huge con is it comes with a huge upfront cost.

Another thing to consider is if rates are at 5%,

you might well be able to go out there and spend that same amount of money

or less to buy that rate down permanently.

So instead of having two, three, four or five and then five for 26 years,

what if you bought it down to four forever?

Another thing to consider, right?

Okay.

Another con about these and this is something that I feel personally about

because I talk to people every day and I know consumer behavior

because I hear the stories, I have the conversations.

And so I've got this boots on the ground type of intimate relationship

with consumer behavior, especially around mortgages and mortgage payments.

Because I'm talking to people every single day.

What happens when you start with this

much lower payment in year one?

Most people, rather than taking the $600 a month savings, which,

by the way, they paid upfront for, they paid it in a lump sum

to save a little bit upfront.

They're going to let their budget expand

into whatever

they're taking home this extra $600,

generally speaking, is not going towards savings.

Generally speaking is not going towards investments.

Generally speaking is only going to get expanded into

with more non-essential items.

Right? A couple more nights out to eat,

an extra trip or whatever the case may be.

So that year two comes and now you've got a payment that's about $200 more.

And you've got to scramble to find out, like, why do I feel short every month now?

We've got to cut one last night out, one less this right to make this new payment.

Then year two comes up, the same thing happens, right?

Your payment goes up another $200.

By the time you get to that

initial interest rate of 5% in $2,476.

That payment feels like a stretch.

If that payment

is a stretch

and the $1,874 was the payment, it's comfortable within your budget.

You should buy something with $1,874 payment from the start.

That's not going to change. Right.

And in this way, it's not necessarily an adjustable rate mortgage,

but it functions like that in that it lulls you into a lower payment

when it adjusts, you can get yourself into trouble.

So for that reason, I personally am,

you know, hesitant to recommend this 3-2-1 to

folks, because I think it

it has that effect on a lot of people

that don't have a really, really strong hold around their budget.

And it's gonna, you know,

allow those first few years to lull them into a lower mortgage payment.

That's that's going to stress them out later.

The last thing I want

as somebody who tries to empower people through education and, you know, is

a big fan of home ownership, is for home ownership to be a burden and a stress.

We want it to be a good thing.

We want it to be, you know, wealth building and all the good things that come

with homeownership, not stress and burden and a payment that's increasing.

And you're figuring out how the heck you're going to pay it. So

in closing, since

I showed you some some pros, smaller payment,

you know, albeit you pay for it, it's there cons, it's not free.

You've got to pay for it.

It's to lull you into, you know, not having a

really good hold on your budget and as it increases can cause issues there.

Ultimately people want to know is it a good deal?

Should I do it?

I think one of the things to consider is who's paying for it.

If a new builder is offering this

and they're going to pay for that by down and this is a common thing with builders,

maybe not necessarily in '20 and '21 because they didn't need to.

But in future years, you might see this from builders,

a 2-1 buydown out where it's just you know, years one

and two or 3-2-1 which is three years of this reduced interest rate,

which turns into a reduced payment.

If they're paying for it, maybe it makes sense

if you're getting a seller credit to pay for it.

This home also might make sense, but I would strongly consider working

with the mortgage professional you're working with and having them show you

what is it going to look like for a permanent buy down?

Or maybe you don't buy it down at all.

Maybe you save the 10,000, 12,000 upfront.

Use that credit to to

offset some of the other costs of the mortgage and

just have a 30 year fixed payment.

That's the same forever. Right.

And sure, you don't start with a lower payment.

You got an extra $12,000 in the bank.

You know, that's offsetting the five or 600 that you're saving per month

on the mortgage.

But at least that mortgage payment, you know, that's a maybe an emergency fund

and the mortgage is something you can afford and fits in your budget

now in forever.

So hopefully that was helpful.

3-2-1.

It's relatively simple, right?

You just get a lower interest rate, which translates into a lower payment

either for the first three years in a 3-2-1, in the first two years in a 2-1.

It's not free.

That's something to remember.

It's a cost, and you're paying what you're saving upfront.

So keep that in mind.

If we can help at all - Greatmortgagebroker.com.

Fill out the form.

Let us know where you're at and how we can help.

And until next time, we 'gon see.