Nov 3, 2024
The 3-2-1 Buydown: A Comprehensive Guide
Understanding the 3-2-1 Buydown
Not every mortgage banker or broker fully understands the 3-2-1 buydown—and that likely means many realtors, attorneys, and accountants may be unfamiliar with it as well. If you're in a deal and looking for a creative solution to make financing more appealing, a buydown may be just the tool you need.
What Is a 3-2-1 Buydown?
A 3-2-1 buydown is typically used as a buyer incentive to reduce the borrower’s mortgage payments for the first three years of homeownership. After the third year, the loan reverts to the original fixed interest rate for the remaining life of the loan.
Here’s how it works with a 30-year fixed mortgage at 6.5% interest:
Year 1: Rate is reduced to 3.5%
Year 2: Rate is reduced to 4.5%
Year 3: Rate is reduced to 5.5%
Years 4–30: Reverts back to 6.5%
Cost Breakdown Example: $100,000 Loan
Year | Interest Rate | Monthly Payment | Standard Payment (6.5%) | Monthly Savings | Annual Savings |
|---|---|---|---|---|---|
Year 1 | 3.5% | $449 | $632 | $183 | $2,196 |
Year 2 | 4.5% | $506 | $632 | $126 | $1,512 |
Year 3 | 5.5% | $568 | $632 | $64 | $768 |
Total buydown cost for a $100,000 loan: $4,476
Buydown Cost by Loan Amount
$200,000 loan: $8,952
$300,000 loan: $13,428
$400,000 loan: $17,904
Seller Concession Guidelines
Keep in mind, the buydown is usually paid by the seller or home builder through a seller concession. But there are limits based on loan type and down payment:
Conventional loan with 10% down: up to 6% seller credit
Conventional loan with 5% down: limited to 3% seller credit
Some first-time buyer programs: allow 6% credit with 5% down
FHA loans: allow 6% seller concession with just 3.5% down
Note: Always verify with a mortgage professional to ensure that the borrower qualifies and that the buydown structure fits within the program guidelines.
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Email: info@lifelenders.net
At Life Lenders we’re proud to offer our mortgage services across the 50 US states, making it easier for you to access the financing you need, no matter where you are.
This communication is intended solely for licensed professionals and is not an offer to lend.