3 2 1 Buydown Mortgage: A Comprehensive Guide

A 3 2 1 buydown mortgage is a type of mortgage that can save you thousands of dollars in interest over the life of the loan.

The 3 2 1 buydown is a type of interest rate buydown that can be used in conjunction with a mortgage. It involves a one-time payment at closing to lower the interest rate on the mortgage for the first three years of the loan.

This payment, also known as the buydown, can be made by the seller, the buyer, or a combination of both. The amount of the buydown will depend on the interest rate reduction desired and the loan amount.

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A 3-2-1 buydown is a mortgage financing technique that allows you to temporarily buy down the rate on your monthly mortgage payments during the initial years of your loan.

The term "3-2-1" refers to the structure of the buydown, which means that the interest rate on your mortgage is reduced by 3% in the first year, 2% in the second year, and 1% in the third year.

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This reduction in interest rate can make a significant impact on your monthly payment, and a 3 percentage point difference can be especially beneficial.

A 3 percentage point difference in your mortgage loan can save you a substantial amount of money each month, which can be used to replenish your savings or emergency fund.

The money you save with a 3-2-1 buydown can also be put toward furniture purchases or repairs and upgrades for your new home, helping you avoid maxing out your credit cards.

After the three-year period, your mortgage rate returns to the original agreed-upon market rate, and you begin to make regular mortgage payments based on that rate.

Here's a breakdown of how the 3-2-1 buydown works:

This program was created to give buyers a little breathing room when higher interest rates threaten to derail their dream of homeownership.

A 3-2-1 buydown can be a great option for homebuyers, but it's essential to consider the pros and cons.

One of the primary advantages of a 3-2-1 buydown is that it allows you to ease into your mortgage payments with lower initial payments.

Lower monthly payments in the early years of homeownership can make a significant difference, particularly for those who anticipate increases in income or have other financial goals to focus on.

However, there are also some drawbacks to consider, such as the upfront costs associated with a 3-2-1 buydown.

These costs can vary, depending on various loan factors, but they will be a consideration in negotiations with the sellers.

Another con is that the reduced interest rates are only temporary, and your interest rate will return to the original rate after the initial period, resulting in higher mortgage payments later on.

A 3-2-1 buydown may not be the best option for everyone, so it's crucial to assess your financial situation, long-term plans, and goals before deciding if a 3-2-1 buydown is the right choice for you.

Here are the pros and cons of a 3-2-1 buydown in a nutshell:

A 3-2-1 buydown mortgage is a financing technique that allows a homebuyer to obtain a lower interest rate for at least the first few years of the loan.

Typically, the seller or homebuilder covers the cost of the 3-2-1 buydown, which equates to the savings to the buyer in the first three years.

The interest rate for a 3-2-1 buydown mortgage is reduced by 3% for the first year, 2% for the second year, and 1% for the third year.

The original interest rate then kicks in for the remaining term of the loan, which can be a fixed rate or an adjustable rate mortgage with an initial period of five years or more.

The interest rate reductions for a 3-2-1 buydown mortgage translate to lower monthly mortgage payments, as seen in Alex's example, where he pays $1,910 per month in the first year, $2,147 per month in the second year, and $2,398 per month in the third year.

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In comparison to a regular fixed-rate mortgage, a 3-2-1 buydown mortgage can result in significant savings, as Alex would pay $77,460 in the first three years instead of $95,761.

However, to procure a 3-2-1 buydown mortgage, a fee must be paid, which is often the same or about the same as the savings from the buydown.

This fee can be paid by the buyer, seller, homebuilder, or lender, and is typically necessary to secure the lower interest rate for the first few years of the loan.

Employers may also pay for a buydown if they are relocating an employee to another area and want to ease the financial burden.

Additional reading: What Is a 2 to 1 Buydown

The cost of a 3-2-1 buydown mortgage is the total amount that the buyer saves over the three-year period of lower rates. This can be a significant advantage for homebuyers.

If the seller pays the fee, you may be able to negotiate a lower price for the home instead of a 3-2-1 mortgage. This would make the price of the home $471,200 instead of $479,501.

Worth a look: 2-1 Buydown Pros and Cons

The benefit of this price reduction is that it doesn't run out, unlike a 3-2-1 mortgage which reverts to the original rate after three years. This can be especially helpful in case of unexpected expenses.

A 3-2-1 buydown temporarily lowers the interest rate on your mortgage by 3 percentage points the first year, 2 percentage points the second year, and 1 percentage point the third year. This can result in a significant impact on your monthly payment.

At 7% interest per year and with a 20% down payment, paying a lower price for the home would result in an annual payment of $30,096, or $2,508 per month.

Discount points, also known as mortgage points, are upfront fees a borrower can pay to get a reduced interest rate over the life of their loan. One discount point costs 1% of the loan amount.

Each discount point may lower the interest rate as much as 0.25%, depending on product and loan characteristics. This means that if you pay one point, you might save 0.25% on your interest rate.

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Discount points are the most effective when a borrower stays in the home long enough for their saving to breakeven on what the points cost. This is because the longer you stay in the home, the more you'll save on interest, which can offset the upfront cost of the points.

To get an idea of how mortgage points may work for you, try our free discount point calculator.

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You can refinance your mortgage after a 3-2-1 buydown, allowing you to explore different loan options and potentially obtain a lower interest rate or change the terms of your loan.

The fees collected for a temporary buydown are applied to reducing your principal loan balance if you choose to refinance or pay off your loan before the end of the buydown window.

This means you won't lose that money by refinancing, unlike paying points, which makes a temporary buydown a great choice for a higher interest rate environment.

A fresh viewpoint: 2/1 Temporary Buydown

You can refinance your mortgage after a 3-2-1 buydown, which allows you to explore different loan options and potentially obtain a lower interest rate or change the terms of your loan.

Refinancing after a temporary buydown is a great choice for a higher interest rate environment that is likely to soften.

The fees collected for a temporary buydown are applied to reducing your principal loan balance if you refinance or pay off your loan before the end of the buydown window.

Explore further: What Is a Temporary Buydown

A seller paying the 3-2-1 buydown fee can be a great deal for buyers, but it's essential to understand the implications.

Sometimes, a seller will pay the fee to attract buyers or as a concession to lock down a sale. This can be a private seller or a builder looking to attract home buyers to a new community.

The buyer might think they're getting free money, but there's a catch. If the seller pays the fee, the buyer can score even more free money another way in some instances.

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If you're buying a new home from a development corporation, a 3-2-1 buydown might make more sense. However, if you're buying from a private seller, you may want to think twice.

The seller paying the fee might make the price of the home $471,200 instead of $489,501. At 7% interest per year and with a 20% down payment, the buyer would then pay $30,096 per year or $2,508 per month.

A 3-2-1 buydown can be paid for by the seller, homebuilder, or even the mortgage lender. This is a popular concession among sellers who are eager to sell for one reason or another.

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In a 3-2-1 buydown, the 3% down payment can come from a gift, a grant, or a combination of both. This option is available for first-time homebuyers.

The 2% down payment can be a second gift, or it can come from a seller concession. This concession is a common practice in the real estate industry.

The 1% down payment can be a combination of both a gift and a grant, or it can be a seller concession.

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A temporary buydown can be tailored to your individual needs, allowing you to reduce your rate for one year or up to three years, depending on your choice.

You can choose to reduce your rate for a shorter period, such as one year, or opt for a longer period, like up to three years. The rate will return to the original fixed rate after the buydown period.

A 3-2-1 buydown program is a type of temporary buydown, which can provide up to $30K in credits.

You can also consider a 3-2-1 buydown program, which involves a predetermined reduction in interest rates during the initial years.

Permanent buydowns involve reducing mortgage payments for a set period, typically 1-3 years, which can be beneficial for borrowers with variable income or those who expect their income to increase in the future.

In some cases, permanent buydowns can be a good option for borrowers who want to reduce their monthly mortgage payments for an extended period, as they can provide long-term savings on interest payments.

Explore further: Permanent Buydown Mortgage

Temporary buydowns, on the other hand, are designed to be short-term solutions that can help borrowers qualify for a larger mortgage or reduce their payments during a specific time frame, often 1-3 years.

Borrowers should carefully consider their financial situation and goals before choosing between temporary and permanent buydowns, as the wrong choice can lead to higher interest payments or difficulty qualifying for a mortgage in the future.

A key difference between temporary and permanent buydowns is that temporary buydowns usually involve a higher upfront cost, which can be a significant expense for some borrowers.

A temporary mortgage buydown can benefit both buyers and sellers by reducing the interest rate for the first few years of the mortgage and making the home more affordable.

For buyers, an interest rate buydown reduces the monthly payment for the term of the buydown, making it a good idea for those looking to save on their mortgage payments.

Consider reading: What Is a Buydown Mortgage

Three years is a long time in the mortgage industry, and the 3-2-1 buydown can get you through the current interest rate hike.

At the end of the three-year program, you can consider refinancing to a lower permanent rate, assuming your home equity is at least 20%.

If rates do increase, you're still ahead of the game with the mortgage rate you originally locked in, making the 3-2-1 buydown a win-win for homebuyers.

The key to using a buydown option is making sure it's discussed during the offer and negotiation process of the home purchase, so buyers and sellers are on the same page.

By using a 3-2-1 temporary buydown, homebuyers can position themselves to refinance at a lower rate in the future, potentially saving thousands of dollars in interest over the life of the loan.