Understanding the 3/2/1 Rate Buydown: A Smart Path to Affordable Homeownership
October 8, 2024
Written by mortgage expert Travis Van Noy, Loan Officer at First Colony Mortgage
Understanding the 3/2/1 Rate Buydown: A Smart Path to Affordable Homeownership
Buying a home is one of the biggest financial decisions most of us will ever make. In today’s market, securing the best mortgage rate can make a significant difference in your monthly payments and overall costs. That’s why we’re excited to offer a 3/2/1 rate buydown on our townhomes and condos. If you’re unfamiliar with what a rate buydown is, or how it can benefit you, this post will give you the information you need to make an educated decision.
What is a 3/2/1 Rate Buydown?
The 3/2/1 rate buydown is a popular option that helps reduce your mortgage rate over the first three years of the loan. Here's how it works:
Year 1: Your interest rate is reduced by 3% below the normal fixed rate.
Year 2: Your rate increases slightly but is still 2% below the fixed rate.
Year 3: Your rate is 1% below the fixed rate.
Year 4 and onward: Your rate returns to the normal fixed rate for the remaining term of the loan.
How Does a 3/2/1 Buydown Save You Money?
Let’s break it down: Imagine you’ve secured a 30-year mortgage with a 6% interest rate. In the first year of the buydown, your rate would be reduced to 3%, in year two, it would rise to 4%, and in year three, it would rise again to 5%. The result? Substantially lower monthly payments for the first three years, giving you more flexibility in your budget as you settle into your new home. Here’s a quick snapshot:
Year 1: 3% rate, lowest monthly payment.
Year 2: 4% rate, moderate payment.
Year 3: 5% rate, payment increases but still below market rate.
Year 4 and beyond: The rate returns to 6%, which is the standard market rate agreed upon when you secured your mortgage.
What Happens After the Buydown Period?
Once the buydown period ends (after the first three years), your interest rate will stabilize at the full fixed rate you locked in. In the example above, that would be 6%. However, the first three years of savings can add up, allowing you to focus on other financial goals like furnishing your new home, saving for emergencies, or making other investments.
Refinancing?
The great news is that if interest rates drop in our scenario, you may never have to pay the 6% interest rate. For example, lets say you are at year 3 in the 3/2/1 buydown in repayment and mortgage rates are at 4%, you can refinance to 4% and not have to pay the 6% interest rate. This is a great option to hedge your bet if interest rates continue to drop.
When to Lock Into a Rate Buydown
3/2/1 rate buydown is ideal if:- You expect your income to grow: The buydown offers lower payments when you might need it the most—right after purchasing your home. If you anticipate your income will increase over time, this structure helps ease you into higher payments.
- You need financial flexibility in the short term: If you're balancing multiple financial responsibilities, such as moving costs, furnishing your new home, or transitioning into a new job, a buydown gives you breathing room for the first few years.
- You want to secure your dream home at today's rates: With mortgage rates fluctuating, locking in a 3/2/1 buydown lets you take advantage of today’s market while offering temporary relief from higher rates.
Why Now is the Best Time to Buy
With our current 3/2/1 rate buydown, you can enjoy affordable payments right after moving into your new townhome or condo. It’s a perfect opportunity to lock in long-term benefits while experiencing immediate savings. Whether you’re a first-time homebuyer or looking for a fresh start, this buydown gives you the flexibility to settle into your new home with confidence.
