When it comes to real estate finance, understanding your options is critical to maximizing your investment. For military veterans and active-duty members, one such option is the VA 3-2-1 Buydown, a relatively under-explored but potent tool for saving money in the short-term.
In this blog post, we will delve into the depths of what is a 3-2-1 VA Buydown, and other buydowns, their advantages, and how it can open doors to significant savings for you.
A Detailed Explanation of the VA 3-2-1 Buydown
There are multiple types of VA buydowns, but for the purposes of this post we will discuss VA buydowns financed by seller credits. The reason why we believe a buydown funded by seller credits is extremely beneficial to our borrowers where as any other type of buydown is much less beneficial. At its core, a buydown is a financial strategy where seller credits used to finance lower interest rates for the buyer for the first 3 years of the loan.
AVA buyer submits an offer to purchase a home, with the offer stipulating the seller provides a credit in the amount to cover the cost of a buydown. During the first year of your mortgage, the interest rate will reduce by three percentage points below your loan’s fixed rate. In the second year, this reduction decreases to two percentage points, and in the third year, it drops to one point. You’ll pay the fixed rate originally agreed upon from the fourth year onwards.
How It Can Benefit Veterans and Active-Duty Military Members
The VA 3-2-1 Buydown is a lifesaver for military members who expect their income to increase over the next few years. It allows for lower initial monthly payments, providing a substantial economic cushion while your career and income growth take off.
It also offers an effective hedge against short-term financial instability, allowing borrowers to weather any immediate economic storms before the full weight of the mortgage kicks in. With this, you can focus on settling into your new home and planning for your financial future with minimal stress.
Interested in exploring the VA 3-2-1 buydown? We specialize in guiding veterans and active-duty military members through their home loan options. Contact us today to see how this program can work for you.
Real-Life Examples of Savings
To illustrate the potential savings, let’s consider a $1,000,000 VA loan with a fixed interest rate of 5.5%. Without the buydown, your monthly principal and interest payments would be roughly $5,678 for the life of the loan.
With the 3-2-1 buydown, your interest rate for the first year drops to 2.5%, reducing your monthly payment to approximately $3,951 – a significant yearly saving of over $20,000. In the second and third years, as the rate rises to 3.5%($4,490) and 4.5% ($5,067), your monthly payments are still significantly lower than the original rate – allowing for continued savings. It also allows for time for rates to drop and the opportunity to refinance at a permanent lower rate. On the 4th year the interest rate would return to the fixed rate 5.5%.
Why Do We Only Recommend a VA Rate Buydown with Seller Credits?
Simple, when a VA Rate Buydown financed with seller credits this money will place aside in an escrow account. Every month your savings is subtracted from this total amount. However, if at any time interest rates fall and VA buyers refinance to a lower, permanent rate then the remaining money in the escrow account is used to either pay down the principal loan balance and/or pay for the refinance costs (including buying points for a permanent rate reduction.
With Rate Buydowns financed by anyone else besides the seller (Hybrid Rate Buydown) i.e. realtors, lenders, buyer, etc. then the Rate Buydown is more like buying points. If a VA buyer does a Hybrid Rate Buydown and then rates fall, if the VA Buyer chooses to refinance the money paid for seller credit is not returned.
Of course, the upfront cost to reduce the interest rate needs to consider, but the substantial early savings and lowered financial stress often outweigh the initial investment. It is important to not that buyers must qualify for the original rate.
Is a 3-2-1 Rate Buydown Financed by Seller Credits Realistic?
As with many things, the answer is it depends. In a very hot seller’s market in an area where there is a lack of inventory, maybe not. However, if the market has more of an equilibrium, or you are working with a motivated seller than it is realistic. It is good to speak with a local real estate expert to determine the appropriate strategy. We used a 3-2-1 Rate buydown in this post but if a 3-2-1 is unrealistic, there are also 2-1, 1-1, and 1-0 options as well. These operate under the same premise, but instead a 2-1 Rate Buydown would mean the VA buyer would get a 2% lower interest rate the first year, a 1% lower rate the 2nd year, and the rate returning to the original fixed rate on the 3rd year.
The VA 3-2-1 Buydown is an excellent tool for veterans and active-duty military members looking to lower monthly payments in the early years of the loan while waiting for increased salary or rates to fall in order to refinance. While it comes with an upfront cost, the potential savings and reduced stress in the early years of your loan can be invaluable.
However, every financial situation is unique. It’s vital to consult with a mortgage professional to help you evaluate whether the VA Rate Buydown is a good fit for you. Elias’ expertise is to help veterans and active-duty military members navigate the complexities of VA loans. If you’re ready to explore the benefits of the VA 3-2-1 Buydown, or using your VA home loan benefits, don’t hesitate to reach out.
Remember, it’s not just about buying a home – it’s about making the best financial decision for your future. Armed with this knowledge of the VA 3-2-1 buydown, you’re one step closer to achieving this goal. So, save this blog post, share it with your friends who may also benefit, and let’s start the conversation about your financial future today!