Understanding the 3-2-1 Rate Buy Down
The 3-2-1 rate buy down is a popular mortgage strategy designed to lower your monthly payments during the initial years of your home loan. It's a temporary buydown where the seller or builder subsidizes a portion of your interest rate for the first three years of the mortgage.
How it Works:
In a 3-2-1 buy down, the interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. After the third year, the interest rate reverts to the original, note rate for the remainder of the loan term.
- Year 1: Interest rate is 3% lower than the note rate.
- Year 2: Interest rate is 2% lower than the note rate.
- Year 3: Interest rate is 1% lower than the note rate.
- Year 4 onwards: Interest rate is the original note rate.
This strategy can make your initial years of homeownership more affordable, especially if you anticipate your income to increase or plan to refinance before the rate reverts. The upfront cost of the buydown is typically paid by the seller or builder as an incentive.
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function calculateBuyDown() {
var noteRate = parseFloat(document.getElementById("noteRate").value);
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var loanTerm = parseFloat(document.getElementById("loanTerm").value);
var resultDiv = document.getElementById("result");
var year1SavingsDiv = document.getElementById("year1Savings");
var year2SavingsDiv = document.getElementById("year2Savings");
var year3SavingsDiv = document.getElementById("year3Savings");
// Clear previous results
year1SavingsDiv.innerHTML = "";
year2SavingsDiv.innerHTML = "";
year3SavingsDiv.innerHTML = "";
resultDiv.style.display = "none";
if (isNaN(noteRate) || isNaN(loanAmount) || isNaN(loanTerm) || noteRate <= 0 || loanAmount <= 0 || loanTerm <= 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
// Function to calculate monthly payment for a given interest rate
function calculateMonthlyPayment(principal, annualRate, termInYears) {
var monthlyRate = annualRate / 100 / 12;
var numberOfMonths = termInYears * 12;
if (monthlyRate === 0) {
return principal / numberOfMonths;
}
var monthlyPayment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfMonths)) / (Math.pow(1 + monthlyRate, numberOfMonths) – 1);
return monthlyPayment;
}
// Calculate monthly payment at the note rate
var noteRateMonthlyPayment = calculateMonthlyPayment(loanAmount, noteRate, loanTerm);
// Calculate payments for each year of the buydown
var year1Rate = noteRate – 3;
var year2Rate = noteRate – 2;
var year3Rate = noteRate – 1;
// Ensure rates don't go below 0
year1Rate = Math.max(0, year1Rate);
year2Rate = Math.max(0, year2Rate);
year3Rate = Math.max(0, year3Rate);
var year1Payment = calculateMonthlyPayment(loanAmount, year1Rate, loanTerm);
var year2Payment = calculateMonthlyPayment(loanAmount, year2Rate, loanTerm);
var year3Payment = calculateMonthlyPayment(loanAmount, year3Rate, loanTerm);
// Calculate savings
var year1Savings = noteRateMonthlyPayment – year1Payment;
var year2Savings = noteRateMonthlyPayment – year2Payment;
var year3Savings = noteRateMonthlyPayment – year3Payment;
// Display results
year1SavingsDiv.innerHTML = "Year 1 Savings: $" + year1Savings.toFixed(2) + "/month";
year2SavingsDiv.innerHTML = "Year 2 Savings: $" + year2Savings.toFixed(2) + "/month";
year3SavingsDiv.innerHTML = "Year 3 Savings: $" + year3Savings.toFixed(2) + "/month";
resultDiv.style.display = "block";
}