A 3-2-1 buydown uses prefunded money to reduce the borrower's payment by three, two, and one rate-equivalent points during the first three years.
A 3-2-1 buydown mortgage is a temporary subsidy arrangement that reduces the borrower’s principal-and-interest contribution for the first three years. Payments are calculated three percentage points below the note rate in year one, two points below in year two, and one point below in year three. The borrower pays the full note-rate payment beginning in year four.
The contractual note rate normally remains unchanged. Money deposited into a buydown account covers each difference between the borrower’s reduced contribution and the full scheduled payment.
For note rate (r), the payment calculation uses:
The subsidy for each month equals:
Total required funds are the sum of all 36 monthly differences. The note-rate payment continues to drive amortization because the account supplies the amount the borrower does not contribute.
Assume a $400,000, 30-year fixed-rate mortgage at a 6.50% note rate. Monthly principal and interest at that rate is approximately $2,528.27.
| Period | Payment-rate equivalent | Borrower contribution | Monthly account draw |
|---|---|---|---|
| Months 1-12 | 3.50% | $1,796.18 | $732.09 |
| Months 13-24 | 4.50% | $2,026.74 | $501.53 |
| Months 25-36 | 5.50% | $2,271.16 | $257.12 |
| Month 37 onward | 6.50% | $2,528.27 | $0 |
Using unrounded payments, the approximate account requirement is:
Rounding each displayed monthly figure can produce a small difference. The lender’s official payment schedule and funding calculation control.
The year-one contribution is about $732 below the lasting note payment. That large opening difference can make marketing comparisons misleading if the full year-four amount is not equally prominent.
In the example, the borrower contribution rises approximately:
The progression is known at closing, but taxes, insurance, mortgage insurance, and association fees may also change. Budgeting should therefore use the full note payment plus a reasonable allowance for non-principal-and-interest costs.
| Feature | 3-2-1 buydown | 2-1 buydown |
|---|---|---|
| Subsidized years | Three | Two |
| Opening rate-equivalent reduction | Three points | Two points |
| Number of scheduled step-ups | Three | Two |
| Illustrative funding on example | $17,888.88 | $9,103.76 |
| Full borrower payment begins | Year four | Year three |
The 3-2-1 structure needs about $8,785 more funding in this example. It offers more near-term relief, but that does not make the underlying loan cheaper than a permanent rate reduction. It changes who supplies portions of the first 36 payments.
A 3-2-1 temporary buydown attached to a fixed-rate mortgage has a fixed note rate and a known subsidy schedule. An Adjustable-Rate Mortgage (ARM) has a contractual rate that can reset according to an index, margin, adjustment dates, caps, and floors.
The two products can display similarly rising early payments, but the causes and future uncertainty differ. With the 3-2-1 schedule, the full fixed note payment is known at closing. With an ARM, later rates depend partly on future index values.
Funding may come from a seller, builder, lender, borrower, employer, or another source allowed by the loan program. The contribution may count toward interested-party limits. The written agreement should establish the schedule, account custody, disbursement, deficiency responsibility, and treatment of remaining money.
Fannie Mae permits eligible temporary buydowns for up to three years, limits annual increases in the effective payment rate to one percentage point, and requires qualification at the note rate. Its requirements also state that the borrower remains obligated for the full note payment if the subsidy funds are unavailable. Other programs may prohibit or modify a 3-2-1 structure.
Do not infer eligibility from a builder advertisement. Verify the loan type, property, occupancy, funding source, duration, and contribution limits with current written requirements.
The account should be fully funded. Match the note payment, borrower contribution, monthly draw, and total deposit shown in the agreement.
Analyze whether the funds could instead lower the home price, pay closing costs, buy the rate down permanently, reduce principal, or remain in reserves. The most visible monthly discount may not create the best overall economics.
Test affordability using the full note payment and likely housing costs. Avoid relying on a raise, bonus, sale, or refinance that has not occurred.
Read what happens after an early sale, refinance, prepayment, transfer, modification, default, or foreclosure. Ownership of the remaining account balance should not be assumed.
This material is educational and is not individualized mortgage, legal, tax, or financial advice. Current program rules and signed loan documents control.