3-2-1 and 2-1 Buydown Explained

In the whirlwind of mortgages and home buying, the landscape can appear complicated and intimidating, especially with current interest rates soaring above 7%. However, there’s a strategy that can be a game-changer right now making homeownership more affordable and achievable: MORTGAGE BUYDOWNS.

But first, let’s crack the term ‘buydown’. Simply put, a buydown is when a borrower pays an upfront fee to lower the interest rate on their mortgage, thus reducing the initial monthly payments. It’s a savvy strategy to make the mortgage more manageable in the early years.

3-2-1 and 2-1 buydowns are common in this current market environment. This offers a period of reduced interest rates before reverting to the original rate, as opposed to a ‘permanent buydown’ that reduces the rate for the entire loan term.

With a 3-2-1 buydown, your interest rate decreases by 3% in the first year, 2% in the second, and 1% in the third. After this three-year period, the rate goes back to the original one for the rest of the loan term. It offers a great way to soften the blow of high interest rates in the early years when budgets can be tight.

The examples below are based on a $700,000 home, a 7.4% interest rate, and a 5% DP. 

A 2-1 buydown works similarly, but over a shorter period: the reduction is 2% in the first year and 1% in the second. This can be a perfect choice if you expect an income increase over the next couple of years.

Given the current high-interest-rate environment, these temporary buydowns can provide significant relief. They allow you to get into a home now, rather than waiting for interest rates to decrease. Plus, as your income grows and the market shifts, you may have the option to refinance the loan when rates start to come down, making these buydowns a strategic tool in your home-buying journey.

So, while buying a home in a high-interest-rate market might seem daunting, knowledge of these tools can empower you to make informed, savvy decisions. Stay tuned for more insights into navigating the mortgage maze, and remember, I’m here to guide you at every step.