3-2-1 Buydown Mortgage: Meaning, Pros and Cons, FAQs

Key takeaways

• A 3-2-1 buydown temporarily lowers a mortgage interest rate for the first three years: 3% below the note rate in year one, 2% in year two, and 1% in year three. The original rate applies from year four onward.
• It’s commonly subsidized by sellers, homebuilders, lenders, or employers, though a borrower can also pay for it.
• The buydown can improve short‑term affordability, but borrowers must be prepared for higher payments when the buydown ends.

What is a 3-2-1 buydown?

A 3-2-1 buydown is a mortgage financing arrangement that reduces the borrower’s interest rate for the first three years of the loan. The reduction schedule is:
* Year 1: note rate − 3 percentage points
Year 2: note rate − 2 percentage points
Year 3: note rate − 1 percentage point
* Year 4 onward: full (permanent) note rate

Unlike permanent rate buydowns (buying discount points), a 3-2-1 buydown is temporary. It’s generally offered for primary and secondary homes and typically not available for investment properties. It may be available on fixed-rate loans or ARMs with sufficiently long initial fixed periods.

How it works

Someone pays the present value of the interest savings for the first three years up front (usually at closing). That upfront payment is used to subsidize the borrower’s monthly payments during the buydown period. The subsidy amount equals the total reduction in interest the borrower receives over those three years.

Example: if the permanent rate is 5%, payments would be based on 2% in year one, 3% in year two, and 4% in year three, then revert to 5% in year four and beyond.

Who typically pays for the buydown?

• Seller or homebuilder — common in soft markets to entice buyers.
• Lender — sometimes offered as an incentive.
• Employer — occasionally used to help relocating employees.
• Buyer — less common; the borrower can pay the upfront cost if desired.

Pros

• Lowers monthly payments during the first three years, improving short‑term affordability.
• Helps buyers bridge to expected higher income or bonuses.
• Gives sellers/builders an alternative to price cuts to make a sale.
• With a fixed-rate mortgage, eventual payments are predictable after the buydown ends.

Cons

• The payment relief is temporary—monthly payments jump when the buydown ends.
• Can encourage buyers to purchase a more expensive home than they can sustain long term.
• If the borrower’s income does not rise as expected, higher future payments may be unaffordable.
• If the seller inflates the sale price to cover the buydown cost, the buyer may not net any real benefit.

Cost

The cost equals the total interest savings provided to the borrower over the three buydown years. That cost is typically paid at closing by whoever is subsidizing the buydown. If the borrower pays, compare the upfront expense against other uses of the cash (e.g., paying higher‑interest debt or investing).

Is a 3-2-1 buydown right for you?

Consider a 3-2-1 buydown if:
* You need lower initial payments to qualify or manage early expenses, and
* You have reasonable confidence in your ability to afford the full payment once the buydown ends.

Avoid it or proceed with caution if:
* Your job or income is uncertain, or
* The subsidy comes with a higher purchase price that negates the benefit.

Always confirm the long‑term payment amount and budget for that level before committing.

FAQs

Q: Who benefits most from a 3-2-1 buydown?
A: Buyers who need short‑term payment relief and expect stable or rising income, and sellers/builders who want to make a property more attractive without lowering the sale price.

Q: Is a buydown the same as refinancing?
A: No. A buydown temporarily reduces the rate via upfront subsidy; refinancing permanently replaces a loan with another loan at a new rate.

Q: Can a buyer pay for the buydown?
A: Yes. A buyer can prepay the subsidy at closing, though that uses cash that might be deployed elsewhere.

Q: Are buydowns available on ARMs?
A: Sometimes, but they are generally not offered with ARMs that have initial fixed periods shorter than five years.

Bottom line

A 3-2-1 buydown can make homeownership more affordable in the short term and is most attractive when someone else pays the subsidy. However, because payments increase after three years, borrowers should confirm they can handle the permanent payment level before choosing this option.