Real Estate Finance News

What is a Rate Buydown  

A 3–2–1 rate buydown is a type of mortgage financing option that allows borrowers to temporarily reduce their interest rate and monthly mortgage payments buy buying down their interest rate during the initial years of the loan.  

This is a good strategy in the current high interest rate environment for home-buyers where it is expected for interest rates to come down once the government is able to get inflation under control and stabilize the economy.  

Here’s how it typically works. 

• The ‘3’ represents the initial interest rate reduction in the first year.
• The ‘2’ signifies the interest rate reduction in the second year.
• The ‘1’ indicates the interest rate reduction in the third year. 

For example, let’s say you have a 30-year fixed rate mortgage with a 3–2–1 rate buydown. The lender might offer you an initial interest rate of 6.125%, but with the buydown your interest rate for the first year would be reduced by 3%, resulting in a rate of 3.125%. 

In the second year, the interest rate would be reduced by 2% making it 4.125%. 

In the third year the interest rate would be reduced by 1% making it 5.125%

At the end of the third year, the interest rate would go to the original rate of 6.125%. 

The purpose of a 3–2–1 rate buydown is to provide borrowers with lower initial monthly mortgage payments, making homeownership more affordable in the early years of the loan. This can be particularly beneficial if you expect your income to increase in the future, or if you want to allocate more funds to other expenses during the initial stages of homeownership. 

There are also 2-1 and a 1 year rate buydown as well. 

In a buyer’s market, the rate buydown cost can be split between the buyer and seller. Or, sellers are willing to pay for the buydown cost instead of lowering the sale price.

For a 3-2-1 rate buydown calculator please click here.