Since spring this year, mortgage interest rates have been on a steady climb. That’s contributing to a cooling in the housing market as would-be buyers wait in the hopes that the recent rate trend will reverse. 

People who need to sell, then, might be motivated to go the extra mile to help a buyer get into their home. And that includes offering a 3-2-1 buydown. 

3-2-1 buydown 101

If you’re not overly familiar with this buyer-benefitting option, let’s go through a quick overview here. 

Usually, a seller or builder will extend the 3-2-1 buydown offer to the buyer, although you could potentially do so yourself as the mortgage lender. 

The 3, 2, and 1 in the name of this buydown describe the interest rate reduction the buyer gets in each respective year. In the first year of their mortgage, their interest rate will be 3% lower than their eventual fixed rate. In year two, they pay interest at a rate 2% less than the fixed rate. In the third year, they get 1% off the interest rate. From year four on, the buyer pays the agreed-upon fixed rate. 

Let’s use an example based on the current national average fixed interest rate on a 30-year mortgage at the time of this writing: 7.42%. With a 3-2-1 buydown, a buyer who signed on a mortgage at that rate would pay 4.42% interest in the first year, 5.42% in the second year, 6.42% in the third, and 7.42% in years four through 30. 

Who pays for the buydown?

In most cases, the individual or builder selling the home pays for the buydown. This gives them a way to incentivize a buyer to pull the trigger on the sale now rather than waiting for rates to come down.

The person or entity covering the buydown puts the money into an escrow account, from which the lender draws to cover the difference between the bought-down rate and the mortgage’s stipulated fixed rate. The numbers get crunched on the frontend to ensure that the escrow account is sufficiently funded to cover all three years of the buydown. 

When 3-2-1 buydowns make sense

With all of the extra finesse required to manage a 3-2-1 buydown — plus the extra money coming out of the seller or builder’s pocket — this situation doesn’t always work. But it can be a useful tool when the seller/builder needs to make a sale and the buyer is hesitant because of high interest rates. 

In the rate environment we’re currently seeing, the 3-2-1 buydown can be a key asset for individuals and groups who need to sell properties. Two-thirds of would-be buyers report that they’re waiting for rates to fall. 

When a seller or builder needs to unload the property, a buydown gives them a very attractive incentive to offer. Rather than waiting for rates to drop, they can effectively decrease the rate for the buyer. And the idea is often that at the end of the three years, if rates have come down, the buyer can refinance into a more advantageous fixed rate (creating more business for you as the lender at that point). 

The trick for the buyer is to ensure that they’re not buying more house than they can afford. The lure of the lowered rate in the first few years can be a strong one. It’s still important to work with them to ensure that as the rate climbs up over the three-year buydown period, they’re able to afford the new payment amount. 

Using a 3-2-1 buydown calculator for buyers

To give buyers an easy way to explore this option, you can feature a 3-2-1 buydown calculator on your website. Here’s an example of the calculator so you can see what it could do for your clientele. 

To use it, they’ll need:

• The loan amount
• The term (in years)
• The interest rate
• The yearly property tax
• The yearly homeowners insurance cost
• The percent of the total loan amount that the third-party will contribute

You can likely help them out with the majority of this information. But if you need resources to pull from, we’ve teed up average property tax amounts and average home insurance costs, both organized by state. 

Once they click “Calculate,” the calculator shows them their monthly payment in the first year. With a drop-down menu, they can explore that monthly payment amount in year 2, year 3, and year 4+. It also breaks those monthly payments down into principal, interest, taxes, and insurance. 

With this calculator, buyers considering a 3-2-1 buydown can budget for those first few years of their mortgage. They’ll see how much they can save with the buydown, but they’ll also be able to prepare for the increased monthly payment in each successive year. 

Get this FREE buydown calculator for your website

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A 3-2-1 buydown can be a useful tool to keep in your back pocket as a lender. If buyers come to you and discover that current rates would make their dream home unaffordable, you can suggest that they ask the seller about this option. The right highly motivated seller may be willing to put up money to fund the buydown so they can make the sale. 

And you can help the potential homebuyer (and even the seller) see if a 3-2-1 buydown makes sense for their situation with a calculator on your own website. Offering up this tool can be a whole lot easier and cheaper than you might think, too.

We have the code for the 3-2-1 buydown calculator available here. You might have a developer who can handle getting that up and running on your mortgage website. But if you want help deploying it on your site, our team at BankingBridge is here. 

To chat with us about adding the 3-2-1 buydown calculator, other handy calculators, live rate tables, and a wide range of other tools to make your site more useful, request a demo today. We specialize in helping lending institutions make their sites competitive with national lenders by adding a robust suite of solutions that help prospective homebuyers.