how 3 2 1 buydown mortgages work
a buydown is a mortgage financing technique that allows a homebuyer to obtain a lower interest rate for at least the first few years of the loan or possibly its entire life it is similar to the practice of buying discount points on a mortgage in return for a lower interest rate except that it is temporary typically the seller or homebuilder sometimes even the mortgage lender covers the cost of the 3 2 1 buydown the cost equates to the savings to the buyer in the first three years in general 3 2 1 buydown loans are available only for primary and secondary homes not for investment properties the 3 2 1 buydown is also not available as part of an adjustable rate mortgage arm with an initial period of fewer than five years the interest rate for a 3 2 1 buydown mortgage is reduced by 3 for the first year 2 for the second year and 1 for the third year the original interest rate then kicks in for the remaining term of the loan 1 by contrast with a 2 1 buydown the rate is reduced by 2 for the first year 1 for the second year and then rises to the original rate when the buydown period ends pros and cons of a 3 2 1 buydown mortgagea temporary interest rate buydown is an alternative to price cuts for sellers and homebuilders this option is typically made available when mortgage interest rates have risen to levels that affect the affordability of home purchases who subsidizes 3 2 1 buydown mortgages the savings experienced by the homebuyer in the first three years of a buydown mortgage term represent the cost of a 3 2 1 buydown mortgage typically the cost is covered by someone other than the buyer the seller homebuilder or even the lender for example motivated sellers might be willing to pay the cost to attract buyers and close the deal in some circumstances a company that s moving an employee to a new city might cover the buydown cost to ease the expense of relocation more commonly real estate developers will offer buydowns as incentives to potential buyers of newly built homes 