2-1 and 3-2-1 Rate Buydowns Explained

Disclaimer: This content may include information about products, features, and/or services that The Federal Savings Bank does not provide and is intended to be educational in nature. 

If you’ve been looking into mortgage options lately, you may have come across terms like “2-1 buydown” or “3-2-1 buydown.” They may sound technical, but the idea behind them is pretty straightforward: namely, helping make early mortgage payments more manageable for borrowers. With interest rates of particular concern to many buyers, it’s normal to wonder how you can step into homeownership without stretching your initial budget too thin.  

Temporary buydowns, like those described above, can, depending on their situation, help certain borrowers do that. But not everyone knows about temporary buydowns before they enter their homebuying process.  

So, in this article, we will break down the 2-1 buydown and 3-2-1 buydown in clear terms, so you can ask informed questions and decide whether this might be a useful tool for your situation.

What is a temporary rate buydown?

Temporary buydowns can help some borrowers temporarily reduce their effective monthly payments by buying down the interest rate for a set period of time. Depending on the type of buydown, this money is generally paid by the seller, lender, or home builder. Those parties might consider offering to pay for the buydown as an incentive to the buyer. With some lenders, you might be able to negotiate a temporary buydown as the borrower, as well, if it seems worthwhile.  

The temporary buydown works by having whichever party is paying for it deposit a lump sum (sometimes known as a “subsidy”) into a buydown account. Then, a portion of that lump sum is used each month to reduce the borrower’s payment until the end of the temporary buydown period.  

Note that temporary buydowns don’t change the total amount you borrow for your loan, and they do not permanently adjust your interest rate. The appeal for buyers is that a temporary buydown can provide some breathing room at the onset of their mortgage. This can be useful especially if they expect their income to increase by the end of the buydown period.

How a 2-1 buydown works

2-1 buydowns are designed to make the borrower’s first two years of homeownership somewhat less costly by temporarily reducing their interest rate. Here’s how the structure generally works: 

• Year 1. Your interest rate is reduced by 2 percentage points, which will give you the lowest monthly payment of your buydown period. 

• Year 2. Your interest rate increases by 1 percentage point, but it’s still 1 point lower than your full rate. 

• Year 3 and beyond. Your loan moves to its full interest rate, which you locked at closing.  

How a 3-2-1 buydown works

As you can imagine, a 3-2-1 buydown works similarly to the 2-1 buydown, but the rate reduction lasts for three years at the beginning of the loan instead of two. The first year of the buydown features the largest payment reduction (and lowest interest rate) for the buyer. To spell it out clearly, the structure works like this: 

• Year 1. Your interest rate is reduced by 3 percentage points, which will give you the lowest monthly payment of your buydown period. 

• Year 2. Your interest rate increases by 1 percentage point, but it’s still 2 points lower than your full rate. 

• Year 3. Your interest rate increases by another percentage point, bringing it one point short of your full interest rate. 

• Year 4 and beyond. Your loan moves to its full interest rate. 

Some lenders may offer to pay for a 3-2-1 buydown for certain buyers (The Federal Savings Bank does not pay for 3-2-1 buydowns), but more likely, this would be a seller-paid option. Finally, not covered here but occasionally seen as another temporary buydown option is the 1-0 buydown, which provides a 1% decrease in rate for the first year of the loan.

Temporary buydown vs. Discount points

In searching for ways to reduce your monthly payment, you may have also heard of discount points. It’s important to understand the difference between temporary buydowns and discount points as you assess your options.  

Temporary buydowns: 

• Limit the rate discount to a set period at the beginning of your loan.  

• Are often funded by a seller, builder, or lender.  

• Do not change your long-term interest rate. 

• Can be helpful if you expect your income to grow.  

Discount points: 

• Are a long-term rate reduction that lasts for the life of the loan.  

• Get paid for by the borrower as part of their closing costs.  

• Are like a tradeoff between higher upfront costs and lower monthly payments. 

• Can be useful if you plan to stay in the home for a longer period of time.  

Neither option is necessarily better than the other. It really depends on your timeline, budget, and how long you expect to keep the mortgage, among other factors.

Final Thoughts

A temporary buydown is just one tool available to some homeowners to potentially make the early years of homeownership feel more manageable. Whether you are able to negotiate a temporary buydown is entirely dependent on your situation.  

For many homeowners who do secure a temporary buydown, it can provide a bit of breathing room during this major life milestone. But every borrower’s situation is different. What matters most at this stage is feeling informed, supported, and confident as you figure out what steps you need to take in your homebuying process.