Homebuyers

How a 3-2-1 Buydown Helped Us Land the Right Home in a Tough Market

In 2023, my husband and I were longing to move from our townhome into a larger house. Our checklist was simple: a bigger backyard for our dog to roam and more space for our growing family.

For months, I had been eyeing a charming, single-family home in Southern California. It had four bedrooms, two baths, a big kitchen, and that all-important yard.

As fate would have it, the house we wanted was still on the market at the time we were ready to buy. It felt like a sign. But there was one major hurdle: Mortgage interest rates in the 6% to 7% range. The monthly mortgage payment felt just out of reach.

Feeling a bit discouraged, we connected with New American Funding. (Full disclosure: My husband and I both work at NAF.) A loan officer patiently walked us through a variety of loan options, explaining how each could be tailored to our own financial situation.

After weighing the pros and cons of the different mortgages, my husband and I landed on a 3-2-1 Buydown loan.

This loan was our golden ticket. A 3-2-1 Buydown meant our interest rate would be significantly lower for the first year, then step up incrementally in each of the next two years before settling into its final fixed rate.

(For the first year of a 3-2-1 Buydown loan, rates are three percentage points lower than the rate you locked in when you took out the loan. The second year, rates are two percentage points lower, and in the third year, rates are one percentage point lower than your contract rate. After that, the rate adjusts to what it was when you secured the loan.)

We were fortunate we didn’t have to pay the fees for the buydown. It cost an estimated $18,000, a fee that was covered partially by the seller and partially by our lender.

This structure gave us lower initial monthly payments, providing us with a much-needed financial cushion as we adjusted to the costs of homeownership. We knew the rate would increase in the second and third years. However, this gave us a clear roadmap to prepare and save.

Our plan was to refinance before the first rate increase, hoping the market would have cooled off. But when the time came, we were in for a surprise: market rates were actually higher than our scheduled second-year rate.

A year later, as we approached our final rate adjustment, market rates were still higher than our final, locked-in rate. The buydown had not only given us an affordable start but had also secured us a long-term rate that beat the market.

Thankfully, mortgage rates have come down recently. So, we are in a good position to refinance on our own terms.

In the end, we didn’t just buy the house we always wanted. We did it in a way that saved us money during our first expensive years in our new home. And those savings wound up coming in handy. 

We were able to get fully settled into our home before welcoming our first son just one year after moving in.