3-2-1 Mortgage Buydown Savings Calculator

A 3-2-1 buydown is a financing option where the interest rate is temporarily reduced to lower your monthly payments. Specifically, the rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year.

This structure acts as a subsidy, providing immediate cash flow relief. It helps buyers qualify for larger loans based on the lower first-year payment and eases the financial transition into homeownership. It is typically funded by the seller as a concession or paid by the buyer via closing costs.

The financial benefit of a buydown depends heavily on three specific inputs:

• Base Interest Rate (Note Rate): The permanent rate starting in Year 4. High base rates typically result in larger potential savings during the discounted years.
• Buydown Cost (Points): The fee paid to secure the lower rate. This is usually expressed as a percentage of the loan amount (e.g., 2.5 points). High costs extend the break-even point.
• Loan Amount: The principal borrowed. Since savings are based on interest, the total savings scale linearly with the size of the loan.

1. Enter the Home Price and your Down Payment to determine the principal loan amount.
2. Input the "Note Rate" quoted by your lender (the permanent rate you would get without a buydown).
3. Enter the Buydown Cost if known (check your Loan Estimate for "Discount Points").
4. Review the Total Gross Savings versus Net Savings to understand the true benefit.
5. Pro Tip: If you don't know the cost, leave it as $0 to see the maximum theoretical savings.

Band 1: Seller-Paid (Cost = $0)

Pure profit. You retain all cash flow savings without any upfront investment.

Band 2: Fast Break-even (< 24 Months)

High efficiency. You recover the cost in under 2 years. A strong option if you plan to stay in the home for more than 3 years.

Band 3: Medium Break-even (24 - 36 Months)

Moderate efficiency. You break even near the end of the buydown period. Risky if you might move or refinance early.

Band 4: Slow Break-even (> 36 Months)

Low efficiency. The cost exceeds the 3-year savings. Only consider if you need the lower payment to qualify for the loan.

• Duration of Homeownership: The single most critical factor. Selling your home before the break-even point results in a net loss on the buydown cost.
• Opportunity Cost: Could the cash used for the buydown earn more elsewhere (e.g., stock market or home improvements)?
• Future Rate Cuts: If market rates drop significantly, you might refinance before Year 3, negating the remaining benefit of the buydown.
• Tax Implications: Points paid for a buydown may be tax-deductible; consult a tax professional regarding IRS Publication 936.

Scenario A: Tight Budget

You are currently cash-strapped but expect your income to rise significantly over the next 3 years (e.g., promotions, career growth).

Scenario B: Seller's Market

The seller offers to pay the buydown cost to close the deal without lowering the listing price, effectively giving you a discount without reducing their home's perceived value.

Scenario C: Rate Locking

You lock in a high fixed rate now but buy down the first 3 years to improve affordability while waiting for market rates to potentially drop for a refinance.

• Scope: Estimates Principal and Interest (P&I) only. It excludes Property Taxes, Homeowners Insurance, HOA fees, and PMI.
• Rate Reset: Remind users that Year 4 payment jumps to the full Note Rate, which may be higher than the rent or previous payments.
• Cost Variability: Buydown costs vary daily by lender and investor. Use this as an estimate, not a final quote.
• Qualifying: Lenders use complex qualifying income ratios; this calculator is for estimation purposes only and does not guarantee loan approval.

• Consumer Financial Protection Bureau (CFPB) - What is a mortgage?
• Fannie Mae - B3-5.3-02: Temporary Interest Rate Buydowns
• Investor.gov - Mortgage Types and Resources