How it Works

A 3-2-1 buydown is a concession to the buyer that reduces the buyer's interest rate and monthly payment for the first three years of homeownership making the home more affordable. In the below example, the seller agrees to finance three years of a lower interest rate for the buyer.

  1. The interest rate for Year 1 is reduced by 3 percentage points
  2. The interest rate for Year 2 is reduced by 2 percentage points
  3. The interest rate for Year 3 is reduced by 1 percentage point
  4. Year 4-life of loan are subject to the original interest rate

The cost to the seller is based on the note rate minus the 3% for the first 12 months and the same for the 2% (13-24 months) and the 1% (25-36 months). To get the total cost from the seller, add all of the differences in figures from the original monthly payment.

Value to Sellers

This could be a great negotiating tool because a greater percentage of homes listed for sale in today's market are seeing price reductions. A 3-2-1 buydown makes the house more affordable to a wider range of buyers who may have otherwise been priced out of the market.

Value to Buyers

Buyers get three years (3-2-1) to absorb the impact of the higher payment and can often finance a higher mortgage amount. It has a much greater impact on the buyer’s monthly payment than reducing the list price of the home.

In the below graph, you will notice how a 3-2-1 buydown versus a price reduction benefits both the seller and buyer.

3-2-1 Seller Buydown versus Price Reduction on a 30-year Mortgage

3-2-1 Mortgage Buydown

*Not including taxes, insurance, or private mortgage insurance (PMI). Figures are rounded to the nearest whole dollar.
**Can be paid by buyer, seller or lender.

Over 10 years that would be a savings of $21,768 for the buyer.

Mortgage Buydown Basics

Payoff Your Mortgage Early

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