3-2-1 BUYDOWN MORTGAGE
Back to GlossaryDefinition
A temporary mortgage buydown that lowers the rate by 3% in year one, 2% in year two, and 1% in year three before reverting.
Summary
A 3-2-1 buydown mortgage is a financing strategy where the interest rate is temporarily reduced for the first three years of the loan. In year one, the rate is 3 percentage points below the note rate, in year two it's 2 points below, and in year three it's 1 point below. After the third year, the rate jumps to the full note rate for the remainder of the loan term. This creates lower initial payments that gradually increase, making homeownership more accessible initially but requiring borrowers to plan for higher future payments.
Usage Context
Important when studying creative financing options, seller concessions, qualifying strategies for marginal borrowers, and understanding different mortgage product structures in real estate transactions.
Common Confusions
- Thinking the reduced rate is permanent rather than temporary
- Confusing buydowns with ARMs - buydowns have predetermined rate changes
- Not understanding that someone must pay upfront to fund the interest rate reduction
- Assuming they qualify based on the reduced payment rather than the full note rate payment
