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Unique Interest Rate Reduction Program
This exclusive Family Mortgage financing alternative offers several advantages for homebuyers.
How It Works:
The 3-Step Mortgage acts like an adjustable rate mortgage, but it is really a fixed-rate mortgage. It’s a financing method where a “stash of cash” is held in an escrow account and the money is used to reduce the monthly payment in the first two years of the loan. But where does this “stash of cash” come from? Most commonly it is provided by the seller or homebuilder but can also come from the real estate agent, employer, mortgage lender or gift funds. For example, if the interest rate which the borrower agrees to pay on his or her fixed rate mortgage note at closing is 6.25%, then the 3-Step Mortgage will work as follows: the interest rate in the first year would be at 2% below this "note rate," or at 4.25%. For the following year (year 2), payments would be due at 5.25%, or 1% below the note rate. At the end of 2 years, the borrower would make payments at the note rate of interest, 6.25%, for the remainder of the loan, thus creating a significant payment reduction for the first two years of the mortgage.
In summary, the 3-Step Mortgage offered on a 6.25% market interest rate provides for payments as follows:
1st (12) months Payments at 4.25% interest
2nd (12) months Payments at 5.250% interest
Remaining Term Payments at 6.25% interest (years 3-30 on a thirty year loan)
How do you figure the amount of money needed? While figuring the exact dollar amount is a little complicated, most mortgage software programs can figure it for us. Family Mortgage has a spreadsheet that outlines this exact dollar figure and what the payments will be based on your specific situation. Although it changes depending on the loan amount, it will generally fall between 2.10 and 2.30 discount points or $4,200 - $4,600 on a $200,000 loan.
The advantages to this financing methodology are numerous:
- Low, initial monthly payments
- Not an adjustable rate – you know when - and how much your payment will change. It’s a fixed rate mortgage product.
- Allows you to maximize the amount of home you are buying
Who Pays For It: There are numerous creative ways to structure this unique program
Typically the seller or homebuilder will pay for the 3-Step Mortgage on behalf of the buyer as an incentive. If the seller does not offer this upfront, you can try to negotiate it as part your purchase offer.
There are two other ways that the 3-Step Mortgage can be structured. If the builder and/or seller are unwilling to pay for the entire cost, then maybe everyone could chip in a little to facilitate a deal. For example, say the seller pays half the cost and then Family Mortgage and the Realtors pay the other half.
The second way is a little more complicated to explain. Let’s say that the builder and/or seller are unfamiliar with how the 3-Step Mortgage works or are lukewarm to the idea, Family Mortgage can pay it for you as an alternative. Here is an example of how this would work; let’s say the current 30 year fixed rate is at 6.25%. Similar to how a No Closing Cost loan works, if you are willing to accept a slightly higher interest rate than the current market rate, the lender pays us a commission in the form of discount points. We use this commission (called the yield spread premium) to pay the cost of the Interest Rate Reduction. Typically, you would be taking a rate approximately 3/4% higher than market to get a commission equal to the cost of the 3-Step Mortgage (2.10-2.30 discount points or $4,200-$4,600 on a $200,000 loan). So using our same example above, here is how it would look with a market rate of 6.25%:
1st 12 months Payments at 5.00% interest
2nd 12 months Payments at 6.00% interest
Remaining Term Payments at 7.00% interest (years 3-30 on a thirty year loan).
The advantages to doing it this way are as follows:
- You may be able to negotiate a reduction in the sales price of the home as an alternative. As mentioned above, the cost of this program will be about 2.10-2.30 discount points or $$4,200 to $4,600 on a $200,000 loan.
- You may be able to negotiate for the builder or seller to pay closing costs as an alternative to funding the cost of the 3-Step Mortgage.
- If you’re planning on staying in the home less than 5 years, you come out ahead under this plan. Call us for a payback analysis.
- Much lower monthly payments on the front end of the loan when you need it most. As your income grows later, you will be able to afford the payments as they increase.
- You can always refinance after the 3-Step Mortgage is up if rates are less than the year three adjusted rate and possibly do it with No Closing Costs
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