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What Is a 3-2-1 Buydown Mortgage?
A 3-2-1 buydown mortgage is a type of loan that charges lower interest rates for the first three years. In the first year, the interest rate is 3% less; in the second year, it's 2% less; and in the third year, it's 1% less. After that, the borrower pays the full interest rate for the remainder of the mortgage.
With today's rapidly increasing rates, this program helps ease a buyer into the home's principal and interest payment.
The borrower must qualify at the note rate. Below is an illustration of how it works. The Total Annual Savings is the cost of the buydown. We can offer 3 buydown options: 1-0 buydown, 2-1 buydown and the 3-2-1 buydown. Note the shorter the buydown term, the lower the cost.
* Rates are only for illustration purposes. Please call in for today's rates and pricing.
Who Pays for a 3-2-1 Buydown Mortgage?
Either the buyer/borrower or the home seller can pay for a buydown mortgage. In the case of a 3-2-1 buydown mortgage, it is often a seller, such as a home builder, who will cover the cost as an incentive to potential buyers. Employers will sometimes pay for a buydown if they are relocating an employee to another area and want to ease the financial burden.
Is a 3-2-1 Buydown Mortgage a Good Deal?
A 3-2-1 buydown mortgage can be a good deal for the homebuyer, particularly if someone else, such as the seller, is paying for it. However, buyers need to be reasonably certain that they’ll be able to afford their mortgage payments once the full interest rate kicks in. Otherwise, they could find themselves stretched too thin.
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Updated March 29, 2022
Published by Investopedia
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