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What is a 3-2-1 Buydown Program?

Many incentives exist to make homes more attractive to buyers. One that can be particularly interesting is a 3-2-1 Buydown Program. “A 3-2-1 Buydown Mortgage is a type of loan that starts out with a low interest rate and rises over the next several years until it reaches its permanent rate.” 

A new home buyer agreeing to a buydown mortgage would agree to a set price, but the interest rate during the first three years of the mortgage is graduated. In the first year, the rate is 3% less than the final, long-term rate; in the second year it is 2% less; in the third year it is 1% less. Beginning in the fourth year, the home owner pays the full interest rate for the remainder of the mortgage period. 

As an example, for a 30-year mortgage at 5% interest, the interest rate would be 2% in year one, 3% in year two, 4% in year three, and 5% for the remaining 27 years.

Another benefit of this program is that it doesn’t have to be over 3 years. It can be over 2 or 1 years along with several other options the seller and buyer can negotiate. 

Who Pays for a 3-2-1 Buydown Mortgage?

Of course, someone pays for the privilege of lowered interest rates and resulting monthly payments over the first three years of the mortgage. If not, the bank is essentially giving away money, which banks never do. Therefore, someone must subsidize the reduced interest rates, or cover the remaining portion (in the year you only pay 2%, someone else pays the remaining 3% in our 5% interest example above). 

In the majority of cases, home builders or sellers pay this cost at closing. These funds are placed in escrow and are drawn out by the bank every month to make up the difference between the full loan payment and the discounted payment the homeowner pays. 

In some cases, a third party will pay for a buydown. For instance, an employer that relocates an employee to a new location may pay for a buydown to help ease the financial burden of moving and purchasing a new home. 

Who Benefits from a 3-2-1 Buydown Mortgage?

Both buyers and sellers can benefit from a 3-2-1 buydown mortgage, although buyers are traditionally viewed as getting the better end of the deal, especially if the seller or another party pays for the buydown.

  • Buyers save considerable money during the first three years
  • Buyers can use this period to buy now at a reduced rate, and either keep the already locked-in final rate or refinance for a lower one. 
  • Buyers can use the monthly savings to manage initial expenses or set aside funds for repairs or remodeling.
  • Buyers can refinance before this buydown benefit is over and can apply remaining funds as a “credit” to closing costs or buying the new mortgage rate down.

 One warning — buyers need to be sure they can afford the final, full mortgage payments and not place themselves in a financial bind. 

For sellers, paying for a 3-2-1 buydown can help them sell their property faster, making it more attractive for buyers who are ready to purchase a home now. The buydown may be less than how much a price reduction would become if the home stayed on the market too long. 

Many Charleston area lenders are taking a fresh look at 3-2-1 buydown mortgages as interest rates have hit the highest point in two decades. Contact Interlinc Mortgage or a real estate professional from Jeff Cook Real Estate to learn more about this attractive incentive and if it could be an available option for you.  

Interlinc Mortgage, Charleston SC


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