What is a Mortgage Buy Down?

A mortgage buy down allows a seller or a buyer to pay cash up front to have interest rates and monthly payments reduced for a period of time. Most often, this is an incentive offered by a home builder or seller to reduce the cost of purchase for a buyer. While the mortgage size remains the same, the initial payments are lower, meaning more buyers can afford the property.

3-2-1 Buy Down

For example, a popular buy down model is the 3-2-1 buy down, which is a three year option. To understand the example, imagine a mortgage of $300,000 that is fixed for 30 years at 7%. The seller or buyer could offer to pay the mortgage company a lump sum of about $16,000 to reduce the monthly payment requirements for the first three years. The first year, the rate would be 4%, the second the rate would be 5%, the third 6%, and finally the mortgage would reach the agreed rate in the fourth year.

The key benefit to this option is the mortgage payments are lowest when you first occupy a home, which is traditionally when your income is also the lowest. Home buyers may ask for a buy down instead of a decreased purchase price on a home to make the home more affordable.