3/2/1 Buydown Mortgage Loan

This is a 30-year fully amortized mortgage. The interest rate increases 1% every year for the first three years. Then the interest rate is fixed for the remaining term.

Here is an example: Your loan balance is $350,000 and the interest rate is fixed at 6.75% for 30 years. The seller (or you) could "buy down" the interest rate by paying a lump sum of $15,853.

This is how it works:

• First-year interest rate is 3.75%, payable $1,621 per month.
• Second-year interest rate is 4.75%, payable $1,826 per month.
• Third-year interest rate is 5.75%, payable $2,043 per month.
• Years four through 30, interest rate is 6.75%, payable $2,270 per month.
• First-year savings (as compared to $2,270 per month) is $649 per month or $7,790.
• Second-year savings (as compared to $2,270 per month) is $444 per month or $6,332.
• Third-year savings (as compared to $2,270 per month) is $228 per month or $2,731.
• Add up the annual savings: $7,790 + $6,332 + $2,731 = $15,853. Therefore, it costs $15,853 to buy down the interest rate and payments for three full years.