•2 min read
A 3-2-1 buydown is a mortgage financing technique that temporarily reduces your interest rate for the first three years of your loan. This creates lower initial payments that gradually increase to the permanent rate, making homeownership more affordable when you need it most.
How the 3-2-1 Buydown Works
With a 3-2-1 buydown, your interest rate is reduced by:
- 3% in the first year
- 2% in the second year
- 1% in the third year
- Full rate from year four onward
Example Scenario
Let's say you qualify for a 7% interest rate on a $400,000 loan:
Year 1: 4% rate (7% - 3%)
- Monthly payment: $1,910
Year 2: 5% rate (7% - 2%)
- Monthly payment: $2,147
Year 3: 6% rate (7% - 1%)
- Monthly payment: $2,398
Year 4+: 7% rate (full rate)
- Monthly payment: $2,661
Total savings in the first three years: Over $20,000
Who Benefits from a 3-2-1 Buydown?
Ideal Candidates
- Growing Income: Expecting raises, promotions, or bonuses
- Career Starters: Recent graduates with increasing earning potential
- Two-Income Planning: One spouse returning to work
- Commission-Based: Building up client base
- Rate Optimists: Expecting rates to drop for refinancing
Perfect Timing For
- High interest rate environments
- Competitive housing markets
- Seasonal income variations
- Startup business owners
- Medical residents/fellows
How Is It Funded?
Seller-Paid Buydowns
Most common scenario:
- Seller pays the buydown cost
- Makes their home more attractive
- Alternative to price reduction
- Win-win negotiation tool
Builder Incentives
New construction often includes:
- Builder-funded buydowns
- Marketing incentive
- Helps sell inventory
- Common in slower markets
Lender Credits
Sometimes available through:
- Higher interest rate
- Lender promotions
- Special programs
- Package deals
Self-Funded (Rare)
You can pay for your own buydown:
- Upfront cost at closing
- May not be cost-effective
- Consider alternatives first
Cost of a 3-2-1 Buydown
The buydown cost equals the interest savings over three years. Using our example:
Year 1 Savings: $751/month × 12 = $9,012 Year 2 Savings: $514/month × 12 = $6,168 Year 3 Savings: $263/month × 12 = $3,156
Total Buydown Cost: $18,336
This amount is placed in an escrow account at closing and applied to your payments.
Advantages of 3-2-1 Buydowns
Lower Initial Payments
- Easier qualification
- More buying power
- Cash flow flexibility
- Adjustment period
Time Benefits
- Build equity immediately
- Lock in home price
- Avoid rising rents
- Tax benefits start now
Financial Planning
- Predictable payment increases
- Time to increase income
- Emergency fund building
- Debt reduction opportunity
Market Advantages
- Competitive offers
- Seller incentive tool
- Builder negotiation
- Rate hedge option
Considerations and Risks
Payment Increases
- Must afford year 4 payment
- Budget for increases
- No payment shock surprise
- Plan ahead financially
Refinancing Assumptions
- Rates may not drop
- Qualification requirements
- Closing costs again
- Market uncertainties
Opportunity Cost
- Large upfront cost
- Alternative uses of funds
- Investment considerations
- Down payment trade-offs
3-2-1 vs. Other Options
vs. 2-1 Buydown
3-2-1 Advantages:
- Longer adjustment period
- Larger initial savings
- More gradual increases
2-1 Advantages:
- Lower total cost
- Shorter commitment
- Quicker to full rate
vs. Permanent Buydown
3-2-1 Advantages:
- Lower upfront cost
- Larger initial reduction
- Flexibility to refinance
Permanent Advantages:
- Lifetime savings
- No payment increases
- Simple structure
vs. Adjustable Rate Mortgage (ARM)
3-2-1 Advantages:
- Predictable increases
- Fixed end rate
- No rate surprises
ARM Advantages:
- Potentially lower rates
- No buydown cost
- Market-based pricing
Qualifying for a 3-2-1 Buydown
Lender Requirements
- Must qualify at full rate
- Standard credit requirements
- Proof of income stability
- Adequate cash reserves
Eligible Loan Types
- Conventional loans
- FHA loans (with restrictions)
- VA loans (seller-paid only)
- Jumbo loans (some lenders)
Property Types
- Primary residences
- Single-family homes
- Condos and townhomes
- Some 2-4 unit properties
Making It Work
Negotiation Strategies
- In Seller's Market: Offer above asking with buydown
- In Buyer's Market: Request as concession
- New Construction: Part of package deal
- Stale Listings: Alternative to price cut
Financial Planning
- Calculate break-even point
- Plan for payment increases
- Monitor refinance opportunities
- Build reserves during low payments
Documentation Needed
- Purchase contract with buydown
- Seller concession agreement
- Buydown agreement
- Escrow instructions
Common Questions
Can I Refinance During the Buydown?
Yes! You can refinance anytime, but:
- Unused buydown funds typically lost
- Must qualify for new loan
- Consider closing costs
- Time it strategically
What If I Sell Early?
- Buydown funds don't transfer
- No refund to buyer
- Seller doesn't recoup
- Factor into selling decision
Are There Tax Implications?
- Seller-paid buydowns generally not taxable
- Consult tax advisor
- May affect seller's basis
- Buyer gets normal deductions
Is a 3-2-1 Buydown Right for You?
Consider a 3-2-1 buydown if you:
- ✓ Expect income growth
- ✓ Want lower initial payments
- ✓ Can afford year 4 payment
- ✓ Have seller willing to pay
- ✓ Plan to stay 3+ years
Avoid if you:
- ✗ Barely qualify at full rate
- ✗ Have unstable income
- ✗ Plan to move soon
- ✗ Can't handle payment increases
Next Steps
Ready to explore a 3-2-1 buydown for your home purchase?
- Calculate Your Savings - See how much you could save
- Check Your Qualification - Ensure you qualify at full rate
- Discuss with Your Agent - Strategy for negotiations
- Compare Options - Consider all buydown types
Get Started Today:
- Calculate Buydown Savings - See your potential savings
- Get prequalified - Check your eligibility
- Compare Rates - View current rates
- Talk to an Expert - Discuss your situation
3-2-1 Buydown FAQs
Q: Who typically pays for a 3-2-1 buydown? A: Usually the seller or builder pays as an incentive to make the sale more attractive.
Q: Can I combine a 3-2-1 buydown with other programs? A: Yes, buydowns can work with FHA, VA, and conventional loans, following program guidelines.
Q: What happens to unused buydown funds if I refinance? A: Typically, unused funds are lost when you refinance, so timing is important.
Q: Do I have to qualify at the reduced payment? A: No, you must qualify at the full note rate to ensure you can afford the permanent payment.
Q: Is a 3-2-1 buydown worth it in today's market? A: It depends on your situation, but with high rates and growing incomes, it's an excellent tool for many buyers.
Interested in a 3-2-1 buydown? Our mortgage experts can help you determine if this strategy fits your homebuying goals. Start your application or contact us to learn more.
