How to Calculate a 3-2-1 Mortgage Buydown: The Exact Math Lenders Don't Show You

What a 3-2-1 Buydown Actually Does to Your Rate

A 3-2-1 buydown temporarily reduces a mortgage's note rate by 3 percentage points in year one, 2 points in year two, and 1 point in year three. In year four, the full contract rate applies for the remaining loan term. The seller, builder, or lender deposits a lump sum into an escrow account at closing. That account funds the monthly payment differential between the reduced rate and the full note rate.

The note rate does not change. The lender receives the full payment every month. The escrow subsidy covers the shortfall. When the escrow account is exhausted after 36 months, the borrower pays the full note rate with no further assistance.

This distinction matters for underwriting. Lenders qualify the borrower at the full note rate, not the temporarily reduced rate. A 7.5% note rate on a $450,000 loan still requires the buyer to qualify at the payment based on 7.5%.

The Core Formula: How to Calculate Each Year's Savings

The savings in any given year equal the difference between the full-rate monthly principal and interest payment and the reduced-rate monthly payment, multiplied by 12.

The standard mortgage payment formula for monthly principal and interest is:

M = P x (r(1 + r)^n) / ((1 + r)^n - 1)

Where:

• M = monthly payment
• P = loan principal
• r = monthly interest rate (annual rate divided by 12)
• n = total number of payments (loan term in months)

Calculate this payment three times: once at the full note rate, once at the year-one reduced rate, and once at the year-two reduced rate. The year-three reduction requires a fourth calculation. Sum the annual differences to find the total buydown savings.

Worked Example 1: $450,000 Loan at 7.5% Note Rate

Loan amount: $450,000. Note rate: 7.5%. Term: 30 years (360 months).

Full-rate payment (7.5%): Monthly rate = 0.075 / 12 = 0.00625 M = 450,000 x (0.00625 x (1.00625)^360) / ((1.00625)^360 - 1) M = $3,146.39

Year one payment (4.5%, which is 7.5% minus 3): Monthly rate = 0.045 / 12 = 0.00375 M = 450,000 x (0.00375 x (1.00375)^360) / ((1.00375)^360 - 1) M = $2,280.08

Year one monthly savings: $3,146.39 - $2,280.08 = $866.31 Year one annual savings: $866.31 x 12 = $10,395.72

Year two payment (5.5%, which is 7.5% minus 2): Monthly rate = 0.055 / 12 = 0.004583 M = 450,000 x (0.004583 x (1.004583)^360) / ((1.004583)^360 - 1) M = $2,554.85

Year two monthly savings: $3,146.39 - $2,554.85 = $591.54 Year two annual savings: $591.54 x 12 = $7,098.48

Year three payment (6.5%, which is 7.5% minus 1): Monthly rate = 0.065 / 12 = 0.005417 M = 450,000 x (0.005417 x (1.005417)^360) / ((1.005417)^360 - 1) M = $2,844.22

Year three monthly savings: $3,146.39 - $2,844.22 = $302.17 Year three annual savings: $302.17 x 12 = $3,626.04

Total buydown savings over 36 months: $10,395.72 + $7,098.48 + $3,626.04 = $21,120.24

The escrow deposit required to fund this buydown equals that same $21,120.24. That is the cost the seller or builder must pay at closing to provide this benefit.

Worked Example 2: $300,000 Loan at 6.875% Note Rate

Loan amount: $300,000. Note rate: 6.875%. Term: 30 years.

Full-rate payment (6.875%): Monthly rate = 0.06875 / 12 = 0.005729 M = $1,970.17

Year one payment (3.875%): Monthly rate = 0.03875 / 12 = 0.003229 M = $1,409.31 Annual savings: ($1,970.17 - $1,409.31) x 12 = $6,730.32

Year two payment (4.875%): Monthly rate = 0.04875 / 12 = 0.004063 M = $1,587.51 Annual savings: ($1,970.17 - $1,587.51) x 12 = $4,590.72

Year three payment (5.875%): Monthly rate = 0.05875 / 12 = 0.004896 M = $1,773.62 Annual savings: ($1,970.17 - $1,773.62) x 12 = $2,358.00

Total buydown savings over 36 months: $13,679.04

Required escrow deposit: $13,679.04

How to Use This Number in a Negotiation

The escrow deposit figure is the seller's cost. A buyer who receives a $13,679 buydown instead of a $13,679 price reduction pays the same amount over the life of the loan only if they hold the mortgage through year four and beyond. A buyer who refinances in year two leaves unused escrow funds with the lender. In most buydown agreements, any remaining escrow balance at payoff or refinance is applied to the loan principal, not returned in cash.

If prevailing rates drop and refinancing within 24 months is likely, a price reduction of equivalent value is almost always the better deal. A $13,679 reduction on a $300,000 loan permanently lowers the principal and reduces every future payment at any rate.

What the Buydown Costs Versus What It Saves: The Break-Even Test

The break-even on a 3-2-1 buydown is always month 37. Before that point, the borrower has received subsidized payments. After month 36, the full note rate applies with no further benefit. There is no ongoing savings after year three.

The correct comparison is not "do I save money during the buydown period." The answer is always yes. The correct question is whether the buydown's escrow cost represents better value than an alternative use of that same dollar amount by the seller.

Three alternatives worth modeling against the buydown cost:

1. A permanent rate buydown (discount points) using the same dollar amount.
2. A reduction in purchase price equal to the escrow deposit.
3. A seller credit applied to closing costs, preserving cash for the borrower.

On a $450,000 purchase with a $21,120 buydown cost, that same $21,120 applied as a price reduction brings the loan to $428,880. At 7.5%, the monthly payment on $428,880 is $3,000.26, a savings of $146.13 per month beginning in month one and continuing for 360 months. Total interest savings over the full loan term: approximately $52,607.

The 3-2-1 buydown saves $21,120 in payments over 36 months and nothing thereafter. The price reduction saves $52,607 over 360 months. In a hold-to-term scenario, the price reduction wins by more than $31,000.

Run These Numbers Against Your Actual Loan Terms

The examples above use round figures and standard amortization. Your loan's actual savings depend on the precise note rate your lender quotes, the exact loan amount after your down payment, and any adjustments for property taxes or homeowners insurance included in the monthly escrow payment.

The CalcMoney Mortgage Calculator applies the exact payment formula to your inputs and shows the year-by-year payment schedule across all three subsidized years. Enter your note rate, loan amount, and term. The calculator outputs each year's monthly payment, the annual savings, and the total escrow cost required to fund the buydown.

Use that output before accepting any seller-funded buydown offer. The math takes under two minutes and determines whether the buydown, a price cut, or a different seller concession returns more value over your expected holding period.

Calculate your 3-2-1 buydown savings now in the CalcMoney Mortgage Calculator →

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.