A 3-2-1 buydown lowers the buyer's interest rate for the first three years of the loan. Year one is 3 points under the real rate. Year two is 2 points under. Year three is 1 point under. From year four on, the buyer pays the full rate. Somebody pays for those cheaper years up front, and that money sits in an account that covers the difference each month. Most of the time the seller pays it as a concession. Here's how I explain it to agents, and how I want you to explain it to your clients.
The short answer
The loan has one real rate, the note rate. A 3-2-1 buydown doesn't change that rate. It pre-pays part of the interest for the first three years. The buyer gets a lower payment while they settle in. The seller gets a sale without slashing the price. The lender holds the money and uses it to top up each payment.
The buyer still has to qualify at the full note rate. That matters. A buydown helps cash flow. It doesn't stretch what the buyer can afford.
Step by step
- Talk to the lender first. Not every loan program allows a 3-2-1. Some programs cap temporary buydowns at 2 points. Ask before you write it into an offer.
- Get the cost. The lender figures the exact dollar amount. It's roughly the total payment savings over the three years.
- Write it as a seller concession. In the offer, ask the seller to pay a set dollar amount toward closing costs and prepaids, including a temporary rate buydown. Use your state's approved forms and check the wording with your managing broker.
- Check the concession limit. Each loan type caps how much the seller can pay. The buydown counts toward that cap.
- Confirm at closing. The buydown funds show on the closing disclosure. Make sure the number matches what you negotiated.
- Set a reminder. Put a task in your CRM for months 11, 23 and 35. Call the client before each payment step-up. That call earns you referrals.
A worked example (illustration only)
Here's the math on a $400,000 loan with a 7.00% note rate, 30-year fixed.
| Year | Rate paid | Monthly principal and interest | Savings per month | Savings that year |
|---|---|---|---|---|
| 1 | 4.00% | $1,909.66 | $751.55 | $9,018.59 |
| 2 | 5.00% | $2,147.29 | $513.92 | $6,167.08 |
| 3 | 6.00% | $2,398.20 | $263.01 | $3,156.09 |
| 4 to 30 | 7.00% | $2,661.21 | $0 | $0 |
Total buydown cost: about $18,342. In most deals, the seller pays that as a concession instead of cutting the price.
Illustration only. A lender sets the real terms. Assumes a $400,000 loan amount, a 7.00% fixed note rate, 360 monthly payments, and principal and interest only. Taxes, insurance, HOA dues and mortgage insurance are not included and would raise the payment. The annual percentage rate (APR) would differ from the note rate. This is not an offer of credit. Rates and program rules change daily.
Now compare. An $18,342 price cut on that same home lowers the loan by about $18,342 at most. That saves roughly $122 a month. The buydown saves $751 a month in year one. For a buyer who's worried about the first couple of years, the buydown wins. For a buyer staying 15 years, a permanent rate buydown or a price cut can win. See rate buydown vs price cut.
How to explain it to your client
"Think of it like a coupon for your first three years. The seller puts money in an account at closing. Every month, that account pays part of your mortgage for you. Year one, you pay like the rate is three points lower. Year two, two points lower. Year three, one point lower. Year four, you're at the real rate. The lender makes sure you can afford the full payment before you start, so there are no surprises. And if rates drop and you refinance, any money left in that account usually goes toward your loan. Your lender will confirm how that works on your loan."
Watch-outs
- Qualify at the full rate. If the buyer only works at the year-one payment, stop. That's a setup for trouble in year four.
- Know the cap. Seller concessions have limits by loan type. Check the current limits with the lender.
- Don't call it a lower rate. The note rate stays the same. Say "lower payment for the first three years."
- Leftover funds. If the buyer refinances or sells early, unused funds are usually applied to the loan. The lender's program decides. Don't promise.
- Appraisal. Concessions don't need to show up in the price, but a big concession on a tight appraisal can draw questions. Talk to your lender.
- No rate quotes from you. You're not the lender. Use real numbers from the lender's worksheet.
This is training for real estate agents. It isn't legal, tax or lending advice. Check with your managing broker on contract wording, and with a licensed loan officer on terms.
Questions
Who usually pays for a 3-2-1 buydown?
The seller, as a concession. A builder or the buyer can pay it too. Sometimes a lender offers one as a promotion.
Does the buyer qualify at the lower rate?
No. They qualify at the full note rate. The buydown just lowers the first three years of payments.
What happens if the buyer refinances in year two?
Unused buydown money usually goes toward the loan. The exact rule depends on the lender and program, so ask.
Is a 2-1 buydown the same thing?
Same idea, two years instead of three. Year one is 2 points under, year two is 1 point under. On the example above, a 2-1 costs about $9,323.
Can I use a buydown on an FHA or VA loan?
Often, yes, with that program's rules. Check the current guidance with the lender and the CFPB's homebuying resources.
Brian Lee Burke is the founder of PadLeaders, a Colorado real estate broker licensed since 2003, team leader of The Kenna Group at Keller Williams DTC (formerly Kenna Real Estate Group) and the author of Mastering Real Estate and The Real Estate Playbook. More about Brian.