3-2-1 Buydown

Since interest rates are rising, you may be worried that your homeownership may be a little bit out of reach. If that’s how you are feeling, you may want to consider a 3-2-1 Buydown. Let’s look at how it works:

What Is A 3-2-1 Buydown?

With a 3-2-1 Buydown, the borrower will pay additional cash upfront to reduce the interest rate over the first three years of the loan. The name 3-2-1 is based on the savings you’ll receive.  

The first year will be 3% lower than the permanent rate, 2% lower for the second year, and 1% lower in the third year. Since interest rates have been so low in recent years, this type of mortgage has not been used. However, now that interest rates are jumping up, we expect the popularity of the 3-2-1 Buydown to increase. 

Save money with a lower interest rate.

Lock in your rate today before they rise.

How Does It Work?

If you’re worried about all of the moving expenses and having to furnish a new home, so you want to save as much money as possible during the first few years you own the home. This would make the 3-2-1 Buydown an excellent option for you. 

Say you qualify for a 30-year mortgage with a 5.5% interest rate. After paying extra for closing costs, this is what your interest rate would look like for the first three years with a 3-2-1 Buydown

2.5% interest rate for the first year

3.5% interest rate for the second year

4.5% interest rate for the second year

5.5% until the loan is paid off

The lowered interest rate will make your monthly mortgage payment lower and could save you thousands of dollars depending on the amount of your mortgage loan. 

Is A 3-2-1 Buydown Right For Me?

Before moving forward with a 3-2-1 Buydown, you would want to make sure that the extra amount you are contributing to your closing costs will not equal more than the amount you will save in the reduced interest rate for the first three years. This is called the breakeven point. 

You’d want to calculate how much extra savings you would get compared to the money you would be charged to buydown the rate.  You would then divide the money you are paying by the amount you’re saving to see how many months it would take to break even. If you anticipate selling the home before the breakeven point, this plan is not a good match for you. 

Do you want to see if a 3-2-1 Buydown would be a good option for you? Let’s run some numbers and find out! 

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