Mortgage 3-2-1 Buydown Cost Comparison Calculator
Compare 3-2-1 vs 2-1 vs no buydown for 2027 mortgages. Year 1 -3%, Year 2 -2%, Year 3 -1%, full note rate from year 4. Free, private seller-paid cost estimator.
| Strategy | Upfront cost | Year 1 monthly | 3-yr total subsidy |
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What is a 3-2-1 mortgage buydown?
A 3-2-1 buydown is a temporary mortgage rate reduction that lasts THREE years (vs the 2-year reduction of a 2-1 buydown). The reduction step-up:
- Year 1: note rate − 3%
- Year 2: note rate − 2%
- Year 3: note rate − 1%
- Year 4-30: full note rate
The funds are deposited into an escrow account at closing — typically paid by the seller as a closing concession, or by the builder as an incentive on new construction. The lender draws from escrow each month to subsidize the borrower's payment.
3-2-1 vs 2-1 vs permanent points cost comparison
For a $425,000 loan at 7.25% note rate (full payment $2,899/mo), here's the cost difference:
- 3-2-1 buydown total cost: ~$17,500 (covers 3 years of subsidized payments)
- 2-1 buydown total cost: ~$10,000 (covers 2 years)
- Permanent 1 point ($4,250): reduces rate by ~0.25% for life of loan, saves $720/year forever
- Permanent 2 points ($8,500): reduces rate by ~0.50%, saves $1,440/year forever
On a holding period of 7+ years, permanent points typically beat temporary buydowns in total interest savings. On 3 years or less, temporary buydowns win. The decision matrix is: how long will you stay AND will rates drop enough to refinance during the subsidy period?
Who funds the buydown and tax implications
Almost always the SELLER or BUILDER funds 3-2-1 buydowns. The escrow deposit is tax-deductible to the payer as a closing expense (sellers), or as a sales incentive (builders). The buyer doesn't get to deduct it — they didn't pay. However, the buyer CAN deduct the mortgage interest they actually pay each month (the subsidized amount). So the deduction is reduced during the subsidy years.
Seller concession limits apply: conventional loans cap concessions at 3% with <90% LTV, 6% with 75-90% LTV, 9% with <75% LTV. FHA caps at 6%. VA caps at 4%. The 3-2-1 buydown cost must fit within the allowed concession plus any other seller-paid closing costs (title, attorney, recording fees, etc.).
Refinancing during the buydown period
If you refinance before the 36-month subsidy ends, unused escrow funds are typically applied to your loan principal as a credit. This effectively gives you free principal reduction worth $5,000-$15,000 depending on when you refi. Some lenders refund the unused amount to whoever paid the buydown (seller), so always read the specific buydown escrow agreement before closing.
The smart play: take a 3-2-1 buydown when rates are likely to drop within 24-36 months, plan to refinance into a permanent lower rate when that happens, and capture the unused escrow as principal reduction. This is the "best of both worlds" strategy.
Source: Fannie Mae Selling Guide B2-1.4-04 (Temporary Buydowns), CFPB Bureau Bulletin 2023-01 on Buydown Disclosures, Federal Reserve Reg Z 1026.43 (ATR/QM standards).