Glossary term
3-2-1 Buydown
A 3-2-1 buydown temporarily lowers a mortgage payment for three years before the borrower pays the full note rate.
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What Is a 3-2-1 Buydown?
A 3-2-1 buydown is a temporary mortgage buydown that lowers the borrower's effective interest rate for the first three years. The payment is typically reduced by 3 percentage points in year one, 2 percentage points in year two, and 1 percentage point in year three before moving to the full note rate in year four.
The lower early payments are usually funded upfront by a seller, builder, lender, or other party. The borrower should still qualify based on the actual loan terms required by underwriting rules.
Key Takeaways
- A 3-2-1 buydown temporarily reduces mortgage payments for three years.
- The payment usually steps up each year until the full note rate applies.
- The upfront buydown cost may be paid by a seller, builder, lender, or borrower.
- It does not permanently lower the mortgage rate.
- Borrowers should plan for the year-four payment before accepting the structure.
How a 3-2-1 Buydown Works
If the note rate is 7 percent, a 3-2-1 buydown might create payments similar to 4 percent in year one, 5 percent in year two, 6 percent in year three, and 7 percent afterward. The note rate itself is not changing; the buydown funds make up the difference during the temporary period.
The structure can help with early affordability, but it can also create payment shock if the borrower is not ready for the full payment.
3-2-1 Buydown Timeline
Period | Typical effective payment reduction |
|---|---|
Year 1 | 3 percentage points below the note rate |
Year 2 | 2 percentage points below the note rate |
Year 3 | 1 percentage point below the note rate |
Year 4 and after | Full note-rate payment |
What Borrowers Should Watch
A 3-2-1 buydown can make a purchase feel easier at closing, but the long-term affordability depends on the full payment. Buyers should compare the buydown with alternatives such as a lower purchase price, permanent rate buydown, larger down payment, or keeping more cash in reserve.
The Bottom Line
A 3-2-1 buydown temporarily lowers mortgage payments for three years before the full note-rate payment begins. It can help with early cash flow, but it should not be mistaken for permanent affordability.