What Is a 3-2-1 Mortgage Buydown? A $350,000 Home Example

If mortgage rates have you putting your home search on hold, you may be wondering whether there are ways to make those first few years of homeownership more manageable.

One option worth discussing with your lender is a seller-paid 3-2-1 mortgage buydown. It provides temporary payment relief during the first three years of your loan, with funds set aside at closing to cover the difference.

For buyers here in Hartville, Lake Township, Green, North Canton and throughout Northeast Ohio, understanding this option can help you have a more informed conversation about your budget and offer.

How does a 3-2-1 buydown work?

A 3-2-1 buydown reduces the amount you pay during the first three years. Your principal-and-interest payment is calculated using a rate that is:

• 3 percentage points below your mortgage’s note rate in year one

• 2 percentage points below in year two

• 1 percentage point below in year three

Starting in year four, you make the full principal-and-interest payment required by your mortgage.

Your actual mortgage rate does not change because of the buydown. Instead, money deposited into a buydown account supplements your reduced payments during those first three years.

What would it look like on a $350,000 home?

Let’s use an illustrative example with these assumptions:

• Home price: $350,000

• Down payment: 10%, or $35,000

• Loan amount: $315,000

• Loan term: 30-year fixed-rate mortgage

• Note rate: 7%

The 7% rate is an example, not a current rate quote. Your available rate and loan terms will depend on your lender and financial situation.

PeriodRate used to calculate your reduced paymentMonthly principal and interestMonthly payment reliefYear 14%$1,503.86$591.84Year 25%$1,690.99$404.71Year 36%$1,888.58$207.12Year 4 onwardFull 7% note rate$2,095.70$0

These amounts are principal and interest only. Property taxes, homeowners insurance, mortgage insurance and any HOA fees are additional. Your total monthly housing payment will be higher, and some of those additional costs can change over time.

How much would the seller need to set aside?

The buydown account needs enough money to cover the difference between your reduced payment and the full payment for all 36 months.

In this example, the seller would contribute approximately $14,444 at closing to fund the buydown, if agreed to in the purchase contract and approved by the lender. Calculations use monthly payments rounded to cents; the lender’s final amount may vary slightly.

This deposit is additional to ordinary closing costs and prepaids. It does not cover your down payment, and it is not a cash payment handed to you at closing.

Can the seller pay the entire amount?

For this Fannie Mae conventional-loan example, a 10% down payment produces a 90% loan-to-value ratio, assuming the appraisal supports the purchase price and there is no additional financing affecting the applicable ratio. The maximum financing concession is generally 6% of the lower of the purchase price or appraised value.

With a supported value of $350,000, that is $21,000. The $14,444.04 buydown fits within that limit, leaving approximately $6,555.96 of potential room for other eligible seller-paid buyer costs.

Other seller credits share that limit. The seller must agree to the contribution, and the lender must confirm the loan’s eligibility, allowed funding and final costs. Different loan programs and lenders can have different requirements.

What should buyers understand before choosing a buydown?

You need to qualify at the full rate. For this fixed-rate Fannie Mae example, qualification is based on the 7% note rate, along with your other housing costs and financial obligations.

Your payment rises each year during the buydown. Plan for the full payment from the beginning. Temporary relief can create breathing room, but it should fit within a budget that works after the subsidy ends.

Refinancing is not guaranteed. Future rates, your finances, the home’s value and closing costs all affect whether refinancing will be available or worthwhile. A purchase plan should work even if you keep the original loan.

Compare how you use a seller credit. Your lender can show you how a temporary buydown compares with help toward closing costs or a permanent rate buydown. The best fit depends on your available cash, budget and goals.

Could a 3-2-1 buydown make sense for you?

A seller-paid buydown can provide meaningful payment relief during the first three years of homeownership. In our example, the first-year principal-and-interest payment is approximately $592 less per month than the full payment.

The next step is to look at your own numbers: the full housing payment, cash needed at closing, available loan programs and whether a seller contribution can be negotiated.

If you’re thinking about buying in Hartville, Lake Township, Green, North Canton or elsewhere in Northeast Ohio, reach out and mention “BUYDOWN.” I can help you explore the homebuying process and connect you with a lender to see whether this option fits your situation.

Jenn McKeever | The KeyGroup | Real of Ohio
Contact Jenn

This article is educational and uses an illustrative example, not a loan offer or rate quote. Availability, rates, fees, contribution limits and qualification requirements vary by lender and loan program.

Sources: Fannie Mae: Temporary Interest Rate Buydowns and Fannie Mae: Interested Party Contributions.