Understanding 1-1, 2-1, and 3-2-1 Buydowns in Real Estate Lending
Imagine stepping into your dream home and feeling that fresh wave of excitement—only to be met by the reality of a high monthly mortgage payment. Don’t let that initial payment shock stand in your way. A buydown could be your secret weapon to ease into homeownership with lower monthly payments during the early years of your loan. At Deadman Realty, we may not be mortgage specialists, but we’re here to guide you every step of the way in your homebuying journey. Let’s take a friendly look at three common buydown options: the 1-1, the 2-1, and the 3-2-1.
1-1 BUYDOWN
A 1-1 buydown offers a one-year reduction on your mortgage interest rate, which gently lowers your monthly payment for that period. After the first year, your rate returns to its original level for the remaining term of the mortgage. It’s a shorter, simpler path to easing into your payments without a big jump later.
Example for a $500,000 Loan at an Assumed 6% Interest Rate
• Without a buydown: Monthly principal and interest payment is around $2,998.
• With a 1-1 buydown: For the first year, let’s say your rate is temporarily 5%. This might reduce your payment to about $2,684, saving you roughly $314 every month for that first year.
2-1 BUYDOWN
A 2-1 buydown steps up your interest rate over two years. Your rate (and thus your monthly payment) is lower in the first year, slightly higher in the second year, and then returns to the full rate in year three. This structure can be helpful if you want a little more financial breathing room as you settle into your home.
Example for a $1,000,000 Loan at an Assumed 6% Interest Rate
• Without a buydown: Monthly principal and interest payment is around $5,995.
• With a 2-1 buydown: In the first year, your rate might be 4% (for instance), dropping your monthly payment substantially—let’s say to around $4,774. In the second year, maybe it goes up to 5%, raising the payment to around $5,368, before finally landing at the original 6% in year three.
3-2-1 BUYDOWN
A 3-2-1 buydown eases you into your mortgage by progressively stepping up the interest rate over the first three years. Here’s how it looks for a $500,000 loan at a 30-year term and an assumed 6% interest rate:
Without a buydown: Monthly principal and interest would be around $2,998 at 6%.
With a 3-2-1 buydown:
Year 1: Rate drops to approximately 3%, so the payment might be about $2,108—saving you around $890 per month (or roughly $10,680 over that first year).
Year 2: Rate rises to 4%, so the payment might be around $2,387—saving you roughly $611 per month (around $7,332 for the second year).
Year 3: Rate goes up to 5%, so the payment might be around $2,684—saving about $314 per month (around $3,768 for the third year).
Year 4 and beyond: The rate settles at the original 6%, with a monthly payment back at around $2,998.
That’s a total possible savings of about $21,780 during the first three years. Keep in mind, the cost of the buydown (the funds that make these temporary rate reductions possible) is generally paid up front—by the buyer, the seller, or a combination of both. However, if you expect your income to rise or simply value the flexibility of lower payments at the start, the 3-2-1 buydown could be a game-changer for easing into homeownership.
Buydowns as Concessions: A Win-Win for Sellers and Buyers
When a seller offers a buydown as a concession, they’re effectively giving the buyer a head start with lower payments during those crucial early years of the mortgage. For sellers, this can make a home far more attractive in a crowded market—by reducing the buyer’s initial costs, the property stands out and can lead to a faster, smoother sale. Buyers, on the other hand, should keep an eye out for properties with buydown concessions, because it can mean more cash left over each month for furnishings, renovations, or just a little financial breathing room.
While we at Deadman Realty aren’t mortgage lenders, we know how to help you make the most of strategies like these—whether you’re selling and want to sweeten the deal or buying and seeking a more manageable monthly payment. If you’re curious about how a 1-1, 2-1, or 3-2-1 buydown could work in your favor, let’s talk and find the perfect fit for your real estate goals.
Let’s Make Your Homeownership Dreams a Reality!
Reach out to Deadman Realty today, and let’s chart a course toward a home (and a payment plan) that truly works for you. We’re here to guide you from one front door to the next—no matter the journey. Your dream home awaits, and we can’t wait to help you open that door!