By Alena Kairys

Jul 22, 2021

If you’re looking to buy a home soon, you’re probably keeping an eye on the current interest rates. When rates are low, it’s often easier to jump into the homebuying process, but not so much when rates are high. Fortunately, you don’t have to let rates deter you from becoming a homeowner: introducing the 3-2-1 buydown mortgage. Read on to learn how a 3-2-1 buydown works.

What is it?

The 3-2-1 buydown is a financing method that allows you to temporarily lower your mortgage’s interest rate for the first three years of the loan. It is more commonly seen when interest rates are high. The 3-2-1 buydown is similar to using discount points to lower your mortgage rate, but differs in that the new rate is temporary rather than for the life of the loan. In order to get the reduced rate, you’ll have to pay an upfront cost at closing, called a buydown fee. In this setup, your starting interest rate will be reduced by 3% for your first year. The second year, your rate will be 2% less and only 1% lower in the third year. After the third year, you’ll be paying the full interest rate for the remainder of your mortgage.  

For example, if you’re approved for a 30-year, fixed-rate mortgage at 4% interest for a $400,000 mortgage, your monthly payment would be $2,580. This is what your monthly payments would look like for the following years of your mortgage with a 3-2-1 buydown in place:

Year 1: $1,957 at 1% interest

Year 2: $2,148 at 2% interest

Year 3: $2,356 at 3% interest

Years 4-30: $2,580 at full 4% interest

Not every mortgage is eligible for a 3-2-1 buydown, however. You wouldn’t be able to take advantage of it if you’re buying an investment property or getting a cash-out refinance. Government-backed loans may have limitations on how a buydown can be used, if at all. Note that even if you’re paying a lower rate for the first three years, you will still need to be qualified for the loan’s initial rate.

Is it right for you?

Paying for your home with this method could be a good fit if you have a lot of cash on hand and anticipate your income increasing within the near future (i.e., a promotion at work or a partner re-entering the workforce). It can give you more breathing room to make any home repairs or save money before the rate returns to its initial point. This structure is also beneficial if the builder or seller agrees to pay the buydown fee. If you decide to buydown the rate yourself, understand that it can come with a level of risk if your income doesn’t increase or even decreases in the future. Generally, the 3-2-1 buydown is better suited if you plan on staying in your home for a while. Be sure to meet with a loan originator who can help you find the right loan type and financing structure for your needs.

A 3-2-1 buydown mortgage helps you ease into your mortgage payments by offering a decreased rate for the first few years of the loan. Even if your savings are temporary, it can be worth it for three years of flexibility.

If you have any questions about the home buying process, contact one of our licensed Mortgage Loan Originators. If you are ready to begin t­­he home buying process, click here to get started!

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.