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📕 Read: How Do 3-2-1 Rate Buy-Downs Actually Work

🎧 Listen: Episode 014 - Mike Boyle Talks specifics on 3-2-1 buydowns

How 3-2-1 Buydown Mortgages Work

I’m in real estate and even I needed some explanation on his this strategy works!

A buydown is a mortgage-financing technique that allows a homebuyer to obtain a lower interest rate for at least the first few years of the loan, or possibly its entire life. It is similar to the practice of buying discount points discount points on a mortgage in return for a lower interest rate, except that it is temporary.

Typically, the seller or homebuilder (sometimes even the mortgage lender) covers the cost of the 3-2-1 buydown. The cost equates to the savings to the buyer in the first three years.

In general, 3-2-1 buydown loans are available only for primary and secondary homes, not for investment properties. 😭 The 3-2-1 buydown is also not available as part of an adjustable-rate mortgage (ARM) with an initial period of fewer than five 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.1 By contrast, with a 2-1 buydown, the rate is reduced by 2% for the first year, 1% for the second year, and then rises to the original rate when the buydown period ends.

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

Pros

• A 3-2-1 buydown mortgage can be an attractive option for homebuyers when mortgage rates are high enough to discourage a home purchase.

• They give home sellers a way to entice buyers in challenging housing markets.

• Buydown loans can be advantageous for borrowers who may not have the needed funds today but expect to have higher incomes in future years.

• Over the first three years of lower monthly payments, borrowers can set aside cash for other expenses, such as home repairs or remodeling.

• When the loan finally resets to its permanent interest rate, borrowers have the certainty of knowing what their payments will be for years to come, which can be useful for budgeting.

• A fixed-rate 3-2-1 buydown mortgage is less risky than an ARM or a variable-rate mortgage, where rising interest rates could mean higher monthly payments in the future.

Cons

• A potential downside of a 3-2-1 buydown mortgage is that it may lull the borrower into buying a more expensive home than they can afford.

• The lower monthly costs are temporary and homebuyers must be prepared for a jump in payments.

• Borrowers who assume that their income will rise enough to afford future payments could find themselves in financial trouble if this fails to occur.

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