What Is a 3-2-1 Mortgage Buy down and how does it work?

buying a home Deanna Picinich January 25, 2024

What Is a 3-2-1 Mortgage Buy down and how does it work?


As a real estate agent, one of my primary roles is to ensure my clients are well-informed about the various mortgage options available to them. While many people are familiar with traditional fixed-rate and adjustable-rate mortgages, there’s another type of mortgage that’s worth considering if you’re looking to buy a home: the 3-2-1 mortgage buydown.

A 3-2-1 mortgage buydown is a financial strategy used by homebuyers to lower their monthly mortgage payments during the first three years of their loan. This is especially appealing to those who expect their income to rise in the coming years and are looking for temporary relief from high monthly payments.

How Does a 3-2-1 Mortgage Buy down Work?

The numbers “3-2-1” in a 3-2-1 buy down refer to the amount of interest reduction a buyer receives over a three-year period. Here’s a breakdown:

  • Year 1: The interest rate on the mortgage is reduced by 3 percentage points lower than the agreed-upon rate.
  • Year 2: The interest rate is 2 percentage points lower than the standard rate.
  • Year 3: The interest rate is 1 percentage point lower than the standard rate.

From the fourth year onwards, the interest rate reverts to the original agreed-upon rate, and the homeowner continues to pay this rate for the remainder of the loan.

For example, if you’ve secured a loan with an interest rate of 6%, with a 3-2-1 buy down, your interest rate for the first year would be 3% (6% – 3%). In the second year, it would be 4% (6% – 2%), and in the third year, it would be 5% (6% – 1%). Starting from the fourth year, the interest rate would return to 6%.

Benefits of a 3-2-1 Mortgage Buy down

  • Lower Initial Payments: One of the main attractions of a 3-2-1 buydown is the ability to enjoy significantly lower mortgage payments during the initial years of homeownership. This can be especially beneficial for buyers who are stretching their budgets to purchase a home and expect their financial situation to improve in the near future.
  • Flexibility: This type of buy down can serve as a cushion for homeowners who foresee a rise in their income or those who might be anticipating significant expenses in the initial years, such as home improvements or starting a family.

Considerations Before Opting for a 3-2-1 Buy down

  • Upfront Cost: To get the reduced rates, the buyer or the builder/seller usually has to pay an upfront fee to the lender. This means that while you’ll save money on your monthly payments in the early years, there’s a cost involved to get those savings.
  • Temporary Savings: It’s essential to remember that the savings from a buy down are temporary. After the first three years, the mortgage payment will increase to reflect the original interest rate.

In conclusion, a 3-2-1 mortgage buy down can be an excellent tool for homebuyers looking for temporary relief from high monthly payments. It’s essential, however, to weigh the benefits against the costs and to consider your long-term financial situation. As always, it’s wise to consult with a mortgage professional or financial advisor to determine if a 3-2-1 buy down is right for you.

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