Purchasing a new construction home is an exciting and significant investment. As you embark on your homebuying journey, one of the most critical decisions you'll make is choosing the right financing option. Among the various choices, two popular options, especially in the current real estate market, are the 30-year fixed loan and the 3-2-1 buydown. In this blog, we'll explore the pros and cons of each and thoughts from Harris Doyle’s preferred lender, Stephanie Gant with Silverton Mortgage, to help you make an informed decision.

A 30-year fixed loan is a popular mortgage financing option designed to help homebuyers purchase a house while providing long-term financial stability. With this type of loan, borrowers agree to repay the borrowed amount over a period of 30 years at a fixed interest rate, which means that the interest rate remains constant throughout the loan term. The primary advantage of a 30-year fixed loan is its predictability, as it allows homeowners to have consistent monthly mortgage payments, making it easier to budget and plan for the long term. While this extended loan term results in lower monthly payments compared to shorter-term loans, it also means that borrowers will pay more in total interest over the life of the loan. Despite the higher overall interest costs, many homebuyers opt for this option due to its affordability and the ability to spread payments over a more extended period, providing financial flexibility.

Pros:

1. Predictable Monthly Payments: A 30-year fixed loan provides stable, predictable monthly payments, making it easier to budget and plan your finances over the long term.
2. Lower Monthly Payments: The extended loan term spreads out your payments over 30 years, resulting in lower monthly installments compared to shorter-term loans.
3. Build Equity Slowly: While this may be a con for some, building equity slowly allows for more manageable monthly expenses, giving you room for other investments or financial goals.

Cons:

1. Higher Total Interest Costs: Due to the longer loan term, you'll pay more in total interest over the life of the loan compared to shorter-term loans.
2. Slower Equity Buildup: It takes longer to build significant equity in your home with a 30-year fixed loan, which can affect your ability to tap into your home's equity for other purposes.

A 3-2-1 buydown is a mortgage financing option designed to temporarily reduce the monthly payments for a homebuyer during the initial years of the loan. This type of buydown involves a temporary interest rate subsidy provided by either the homebuilder, seller, or another party involved in the real estate transaction. Here's how it works:

During the first three years of the mortgage, the interest rate is "bought down" by a certain percentage. For example, if the original interest rate is 5%, the buydown might reduce it to 2% for the first year, 3% for the second year, and 4% for the third year.

The purpose of a 3-2-1 buydown is to make homeownership more affordable in the early years when homeowners may have additional expenses related to moving, furnishing the home, or adjusting to new financial responsibilities. It can be particularly attractive to first-time homebuyers who may benefit from lower initial monthly payments.

Pros:

1. Lower Initial Monthly Payments: The primary benefit of a 3-2-1 buydown is that it reduces the homeowner's initial monthly mortgage payments. This can be particularly helpful for first-time buyers who may have additional expenses related to moving, furnishing their new home, or addressing other immediate needs.
2. Easier Budgeting in the Early Years: With lower initial payments, homeowners can more easily budget and allocate funds to other aspects of settling into their new home. This can provide a cushion during the initial adjustment period to homeownership.
3. Temporary Financial Relief: The buydown provides temporary financial relief  during the first three years of the mortgage. This can be advantageous if homeowners expect changes in their financial situation, such as starting a family, pursuing additional education, or dealing with other transitional expenses.

Cons:

1. Future Payment Increases: The primary disadvantage of a 3-2-1 buydown is that, after the initial three-year period of reduced payments, the interest rate gradually increases over the next two years. This means that homeowners will experience an increase in their monthly mortgage payments. It's crucial for first-time homebuyers to understand and budget for these future increases to avoid financial strain. 
2. Full Payments Begin After Subsidized Period: After the initial three-year period of reduced payments, homeowners will start making payments at the full, original interest rate. This transition to higher payments should be carefully planned for, as it may coincide with other life changes or increased financial responsibilities.
3. Dependency on Future Income: The assumption with a buydown is often that homeowners' incomes will increase over time to accommodate the rising mortgage payments. However, this relies on future income growth, which is not guaranteed. Changes in employment or other financial setbacks could impact the ability to cover higher payments.

The decision between a 30-year fixed loan and a 3-2-1 buydown ultimately depends on your financial goals and current circumstances. Here are some key considerations:

Short-Term Affordability vs. Long-Term Stability:

30-Year Fixed Loan: Provides stability with consistent monthly payments over the entire 30-year term. This can be beneficial for long-term budgeting and financial planning.

3-2-1 Buydown: Offers short-term affordability with lower initial payments for the first three years, followed by gradual increases. Consider whether you prioritize immediate affordability or long-term payment stability.

Future Income and Financial Stability:

30-Year Fixed Loan: Assumes a steady income over the long term, as the payments remain consistent. Suitable for those who prefer the predictability of fixed payments.

3-2-1 Buydown: Assumes an increase in income over the next few years to accommodate rising payments. Evaluate the stability of your income and job situation, as well as potential career advancements.

Financial Goals and Flexibility:

30-Year Fixed Loan: Provides financial stability but may result in higher initial monthly payments compared to a buydown. Suitable for those who prioritize long-term financial security.

3-2-1 Buydown: Offers flexibility in the early years with lower payments, which may be beneficial if you have immediate financial needs or anticipate increased income in the future.

In conclusion, the choice between a 30-year fixed loan and a 3-2-1 buydown for your new construction Harris Doyle Home is a significant one. Carefully assess your financial situation, goals, and risk tolerance to make the decision that best aligns with your needs and aspirations for your new home. 

Contact Silverton's Mortgage Loan Originator, Stephanie Gant, for a free confidential review of your financial situation. Silverton Mortgage has a team of processors and underwriters specifically for Harris Doyle Homes' buyers, who are available to answer questions seven days a week.