Is a 3 -2- 1 buy down really good for a first time buyer with little money and big taste?

Asked by SIS, Boykins, VA Mon Mar 8, 2010

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Barbara Q., , Bergen County, NJ
Wed Mar 10, 2010
SIS- Based on your previous question, I believe you are asking about a Seller-Funded Buydown. Whether or not this is a financially suitable option for you depends on whether or not you qualify for the loan.

Temporary Buydowns offer the initial low interest rates of an ARM with the security of knowing that you locked into today's historically low 30 year fixed rate. Buydowns are not TOXIC or RISKY loans because you know EXACTLY what your payment is going to be for the life of the loan. There are no SURPRISE ADJUSTMENTS or PAYMENT SHOCK as there are in Option ARMs. Also, the lender often qualifies the Borrower at the 2nd year rate or may qualify you at the note rate. if you qualify, then it is not a BIG Risk as others have previously mentioned.

Seller-Funded Buydowns are a great way for a Seller to expand his pool of qualified Buyers and increase market potential. The cost for the Seller is small while the savings for the Buyer are BIG and allow a Buyer to ease into Homeownership comfortably and confidently. (Tax Benefit: The Seller pays points at closing to Discount the rate, the Buyer is able to use the cost of the interest rate buydown as a tax deduction in accordance with IRS Revenue Procedure 94-27. Must be a primary residence to Loan Amount up to $1 Million.)

I still stand by what I had posted in response to your previous question:
Your lender will qualify you to let you know if a Temporary Buydown is a feasible option based on your income, assets and creditworthiness.

Good Luck with your decision!
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Andy Krumholz, Agent, Reston, VA
Mon Mar 8, 2010

As you're seeing in the responses below, tread carefully. If you can't afford the year 4 payments today, and you're banking on your income going up to meet the projected payments, you're taking a big risk. If your income doesn't go up as planned, or if something happens to your job, you stand a good chance to lose your home and damage your credit for a number of years after that.

Here's an alternative to the 3-2-1 buydown. Tell the lender to utilize the money being offered to accomplish a 3-2-1 buydown, to buydown the rate for all 30 years. The rate will not be bought down as much, but it will be permanent (for all 30 years), thus your payment will stay consistent month in and month out for the term of the mortgage. This is a much safer route for you.

I hope that helps.

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Vivianne Rut…, , Fairfax County, VA
Mon Mar 8, 2010
It is an excellent program as long as the property is priced correctly and you qualify for the purchase based on the regular (year 4) payments.

Think of it as a subsidy from the seller that allows you to use the extra money during the first three years to furnish and decorate the house - of course, assuming the house is priced correctly and you will have no problems meeting your obligations in the future.
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Joseph Domino, Agent, Scottsdale, AZ
Mon Mar 8, 2010
A 3-2-1 buydown in great, if you can afford the payment that will come in year 4 (no buy down). A lot of people got in trouble with this scheme back in 2006 when the builders were buying down loans just to sell inventory. Many of those homes ended up as foreclosures.

It is always good to save money, but do not get in over your head.
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Pat Mulligan,…, Agent, Chesapeake, VA
Mon Mar 8, 2010
Dear Sis,

It is only a good deal if you think your income will go up over time, or i you think you can save the difference monthly or what it will adjust to, or if you think you will be selling in 2-3 years.

Any kind of variable rate loan, including Buy Downs, have thier place, but IMO: at these current rates, a prudent buyer will purchase something with a fixed 30 or even 15 year term in order not to get over extended, unless of course, of the situations above applies.

Dve Ramsey will tell you you need 10% down payment too, but I wouldn't go THAT far!

Best wishes to you,

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