The 3-2-1 buydown is a financing method that allows you to temporarily lower your mortgage’s interest rate for the first three years of the loan. It is more commonly seen when interest rates are high. The 3-2-1 buydown is similar to using discount points to lower your mortgage rate, but differs in that the new rate is temporary rather than for the life of the loan. In order to get the reduced rate, you’ll have to pay an upfront cost at closing, called a buydown fee. In this setup, your starting interest rate will be reduced by 3% for your first year. The second year, your rate will be 2% less and only 1% lower in the third year. After the third year, you’ll be paying the full interest rate for the remainder of your mortgage.
Not every mortgage is eligible for a 3-2-1. 2-1 or 1-YR buydown. Buydowns cannot be utilized for investment property purchases or cash-out refinance transactions. Government-backed loans may have limitations on how a buydown can be used, if at all. Regardless of the term of the buy down or the initial payment as a borrower you will still need to qualify off the qualifying note rate.
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