A 3-2-1 buydown is a popular mortgage rate buydown strategy designed to lower your monthly payments during the initial years of your loan, making homeownership more affordable upfront. This temporary interest rate reduction is typically funded by the seller, builder, or lender as an incentive for the buyer.
How it Works:
The "3-2-1" refers to the percentage points by which your interest rate is reduced from the initial note rate:
Year 1: Your interest rate is reduced by 3 percentage points.
Year 2: Your interest rate is reduced by 2 percentage points.
Year 3: Your interest rate is reduced by 1 percentage point.
Year 4 onwards: You pay the full, initial note rate for the remainder of the loan term.
For example, if your initial note rate is 7.0%, your actual interest rate would be:
Year 1: 4.0% (7.0% – 3%)
Year 2: 5.0% (7.0% – 2%)
Year 3: 6.0% (7.0% – 1%)
Year 4 onwards: 7.0%
The Math Behind the Calculator:
Our calculator helps you estimate the potential savings from a 3-2-1 buydown. It works by calculating the monthly principal and interest (P&I) payment for each year under the buydown scenario and comparing it to the payment you would make if you paid the full note rate from the beginning.
The core calculation uses the standard mortgage payment formula (M):
$n$ = Total number of payments (Loan term in years * 12)
The calculator determines:
The effective monthly interest rate for Year 1, Year 2, and Year 3 based on the initial rate and the specified reductions.
The monthly P&I payment for Year 1, Year 2, and Year 3 using the reduced rates and the full loan term.
The monthly P&I payment from Year 4 onwards, using the initial note rate and the full loan term.
The total interest paid over the life of the loan under the buydown scenario.
The total interest paid over the life of the loan without the buydown (at the initial note rate).
The total savings realized through the buydown, primarily from the reduced interest paid in the first three years.
Benefits of a 3-2-1 Buydown:
Reduced Initial Payments: Significantly lowers your monthly housing costs in the crucial first three years of homeownership, easing the financial transition.
Improved Cash Flow: Frees up funds that can be used for moving expenses, furniture, home improvements, or simply building savings.
Potential to Qualify: In some cases, the lower initial payments can help borrowers qualify for a larger loan amount.
Investment Opportunity: Allows buyers to potentially invest the difference saved in the first few years.
Considerations:
Temporary Savings: Remember that the savings are temporary. Payments will increase in subsequent years.
Upfront Cost: The buydown requires an upfront payment, typically funded by the seller or lender, which might be rolled into the loan or paid separately.
Loan Term: This strategy is most effective on longer-term loans (e.g., 30 years) where the difference in monthly payments is substantial.
Interest Rate Environment: While beneficial for affordability, ensure the initial note rate is competitive for the current market if you plan to refinance later.
Use this calculator to see how a 3-2-1 buydown could impact your monthly budget and overall savings. Consult with your mortgage lender for specific details and eligibility.
function calculateMortgagePayment(principal, annualRate, years) {
if (isNaN(principal) || isNaN(annualRate) || isNaN(years) || principal <= 0 || annualRate < 0 || years <= 0) {
return 0;
}
var monthlyRate = (annualRate / 100) / 12;
var numberOfPayments = years * 12;
if (monthlyRate === 0) {
return principal / numberOfPayments;
}
var payment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments)) / (Math.pow(1 + monthlyRate, numberOfPayments) – 1);
return payment;
}
function calculateBuydown() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var initialRate = parseFloat(document.getElementById("interestRate").value);
var reduction1 = parseFloat(document.getElementById("rateReduction1").value);
var reduction2 = parseFloat(document.getElementById("rateReduction2").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ''; // Clear previous results
// Input validation
if (isNaN(loanAmount) || loanAmount <= 0 ||
isNaN(initialRate) || initialRate < 0 ||
isNaN(reduction1) || reduction1 < 0 ||
isNaN(reduction2) || reduction2 < 0) {
resultDiv.innerHTML = "Please enter valid positive numbers for all fields.";
return;
}
// Assuming a standard 30-year loan term for calculation purposes
var loanTermYears = 30;
var remainingYears = loanTermYears – 3; // Years after the buydown period
// Calculate rates for each period
var rateYear1 = initialRate – reduction1;
var rateYear2 = initialRate – reduction2;
var rateYear3 = initialRate – 1; // Standard 3-2-1 buydown implies 1% reduction in year 3
var rateYear4Plus = initialRate; // Full rate after buydown
// Ensure rates don't go below 0
rateYear1 = Math.max(0, rateYear1);
rateYear2 = Math.max(0, rateYear2);
rateYear3 = Math.max(0, rateYear3);
// Calculate monthly payments for each period
var paymentYear1 = calculateMortgagePayment(loanAmount, rateYear1, loanTermYears);
var paymentYear2 = calculateMortgagePayment(loanAmount, rateYear2, loanTermYears);
var paymentYear3 = calculateMortgagePayment(loanAmount, rateYear3, loanTermYears);
var paymentYear4Plus = calculateMortgagePayment(loanAmount, rateYear4Plus, loanTermYears);
// Calculate total payments for each period
var totalPaymentsYear1 = paymentYear1 * 12;
var totalPaymentsYear2 = paymentYear2 * 12;
var totalPaymentsYear3 = paymentYear3 * 12;
var totalPaymentsYear4Plus = paymentYear4Plus * (loanTermYears – 3) * 12;
// Calculate total interest paid with buydown
var totalInterestBuydown = (totalPaymentsYear1 + totalPaymentsYear2 + totalPaymentsYear3 + totalPaymentsYear4Plus) – loanAmount;
// Calculate total interest paid without buydown
var totalInterestNoBuydown = calculateMortgagePayment(loanAmount, initialRate, loanTermYears) * loanTermYears – loanAmount;
// Calculate total savings
var totalSavings = totalInterestNoBuydown – totalInterestBuydown;
// Display results
var resultHtml = "