The Buydown Calculator helps you understand the potential savings from a mortgage buydown option, where an upfront payment temporarily reduces your interest rate.
This tool calculates both the monthly and annual savings based on your selected buydown type, loan amount, and interest rate. Explore how a buydown might lower your initial payments and make your mortgage more affordable.
You can choose from the following buydown options:
- 3-2-1 Buydown: Reduces the interest rate by 3% in the first year, 2% in the second year, and 1% in the third year.
- 2-1 Buydown: Reduces the interest rate by 2% in the first year and 1% in the second year.
- 1-1 Buydown: Reduces the interest rate by 1% for two years.
- 1-0 Buydown: Reduces the interest rate by 1% for the first year only.
Buydown Calculator
Types of Buydown Options
A mortgage buydown allows borrowers to temporarily lower their interest rate, typically in the early years of their loan, by paying a lump sum up front.
Different buydown types offer varying periods and levels of interest rate reduction, helping borrowers ease into their mortgage payments. Here’s a breakdown of the main buydown types:
| Buydown Type | Description | Interest Rate Reduction | Example Years |
|---|---|---|---|
| 3-2-1 Buydown | Offers the largest reduction in the first year, followed by a gradual increase over the next two years. | 3% reduction in year 1, 2% in year 2, and 1% in year 3 | Year 1: 3% Year 2: 2% Year 3: 1% |
| 2-1 Buydown | Provides a moderate reduction for two years, with a smooth transition to the original rate. | 2% reduction in year 1 and 1% in year 2 | Year 1: 2% Year 2: 1% |
| 1-1 Buydown | Offers a smaller reduction for the first year and steps up gradually. | 1% reduction for two years | Year 1: 1% Year 2: 1% |
| 1-0 Buydown | Provides a 1% reduction for the first year only. | 1% reduction in year 1 | Year 1: 1% |
How the Buydown Amount is Calculated
The buydown amount is the total cost required to reduce the interest rate on a mortgage over a specified period. This cost is calculated by summing up the differences in monthly payments between the original rate and the reduced rates during the buydown period. Here’s the calculation broken down:
- Determine Reduced Rates by Year: For each year in the buydown period, apply the reduced rate (e.g., 3-2-1 buydown would reduce by 3%, then 2%, then 1%).
- Calculate Monthly Payment Differences: For each year, calculate the monthly payment based on the reduced rate and subtract it from the monthly payment at the original rate. This gives the monthly savings for that year.
- Sum Monthly Savings: Multiply the monthly savings by 12 for each year, then sum up all the years’ values to get the total buydown cost.
Example Calculation for a 3-2-1 Buydown on a $300,000 loan at 6.25%
- Year 1: 3% reduction gives a rate of 3.25%. Monthly payment difference from the original rate is calculated and multiplied by 12.
- Year 2: 2% reduction gives a rate of 4.25%. Repeat calculation and sum with Year 1.
- Year 3: 1% reduction gives a rate of 5.25%. Repeat calculation and sum with previous years.
The final sum is the total buydown cost required to secure the reduced payments over the first three years of the loan.
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