What Is a 3-2-1 Mortgage Buydown 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 Buydown Work?
The numbers "3-2-1" in a 3-2-1 buydown 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 buydown, 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 Buydown
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 buydown 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 Buydown
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 buydown 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 buydown 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 buydown is right
for you.