Understanding the 3-2-1 Buydown Mortgage

Understanding the 3-2-1 Buydown Mortgage

If you're looking to buy a home but high mortgage rates are holding you back, a 3-2-1 buydown mortgage might be the tool you need to make it happen. This type of loan lowers your interest rate for the first three years, easing you into homeownership. Starting in the fourth year, the full original rate takes over and stays for the rest of the term. I'll explain how it works and help you decide if it fits your situation.

Key Takeaways

With this mortgage, you pay a reduced interest rate for the first three years—specifically, 3% less in year one, 2% in year two, and 1% in year three. For instance, if the base rate is 5%, you'd pay just 2% initially. Once the buydown ends, the lender applies the full rate for the remaining years. Sellers, especially home builders, often use these to make properties more appealing to buyers.

How 3-2-1 Buydown Mortgages Work

A buydown is a straightforward financing method that gives you a lower interest rate early in the loan, much like buying discount points but only temporarily. Usually, the seller, builder, or even the lender picks up the tab, which equals the savings you get over those three years. These are typically for primary or secondary homes, not investments, and they're not available on adjustable-rate mortgages with initial periods under five years.

The rate drops by 3% the first year, 2% the second, and 1% the third, then reverts to the original. Compare that to a 2-1 buydown, which only reduces by 2% then 1% before going full rate.

Pros and Cons of a 3-2-1 Buydown Mortgage

On the positive side, this mortgage can draw you in when rates are sky-high, helping sellers move properties in slow markets. It's great if you expect your income to rise, giving you lower payments upfront to save for things like repairs. You know exactly what payments will be after year three, aiding budgeting, and it's safer than ARMs where rates could spike unpredictably.

But watch out: it might tempt you into a pricier home than you can handle long-term. Those low payments are short-lived, so you need to be ready for the increase. If your income doesn't grow as hoped, you could end up in trouble.

Fast Fact

Think of a temporary buydown as a seller's alternative to slashing the home price—it's offered when rising rates make buying tougher.

Who Subsidizes 3-2-1 Buydown Mortgages?

The cost matches what you save in those first three years, and it's usually covered by the seller, builder, or lender to seal the deal. Sometimes, if a company is relocating you, they'll pay to soften the move. Developers often throw this in for new builds to boost sales.

Is a 3-2-1 Buydown Mortgage Right for You?

Don't bank on future income growth to cover the rate jump in year four—that's risky. Assess your job stability and potential surprises that could make payments unaffordable. If you're paying for the buydown yourself, weigh if the upfront cash is better spent elsewhere, like high-interest debt. When someone else pays, ensure the full payments fit your budget and that you're not overextending on a padded home price.

What Does a 3-2-1 Buydown Mortgage Cost?

It costs the total savings you get from the reduced rates over three years.

Who Pays for a 3-2-1 Buydown Mortgage?

Typically, the seller, builder, or lender handles it, though employers might cover it for relocations, and occasionally you as the buyer would pay.

Is a 3-2-1 Buydown Mortgage a Good Deal?

It can be solid if someone else foots the bill, but you must be confident in affording the full rate later—otherwise, financial strain or even losing the home could result.

The Bottom Line

This mortgage lets you buy in a high-rate market by cutting early payments, but remember, costs rise in year four and stay there. Make sure you understand the full picture before committing.