The Rate Buydown, Explained
The seller concession that goes further than a price cut.
When a home has been on the market a few weeks and a buyer is close on price, the instinct is to lower the price. Before you do, it's worth knowing about the rate buydown.
How it works
The seller gives the buyer a credit at closing, and the buyer's lender uses it to lower their interest rate. The buyer gets a smaller monthly payment. The seller keeps more than a price reduction guarantees.
Why it goes further
When a seller lowers the price by $40,000, the buyer's loan only shrinks by about $32,000, since part of the reduction comes off their down payment. The monthly payment barely moves.
A buydown puts that same $40,000 toward the rate, and the lower rate applies to the entire loan.
Here's what that looks like on a $2,000,000 home with 20% down and a 30-year fixed rate of 7.25%, close to where rates are this fall.
The same $40,000 from the seller, two ways
| Rate | Monthly payment | Buyer saves | |
|---|---|---|---|
| No concession | 7.25% | $10,915 | – |
| $40,000 price reduction | 7.25% | $10,697 | $218 a month |
| $40,000 rate buydown | about 6.625% | $10,245 | $670 a month |
To save the buyer that same $670 a month with a price cut, the seller would need to come down about $123,000.
Example: $2,000,000 purchase, 20% down, 30-year fixed at 7.25%. Assumes each point (1% of the loan) lowers the rate by about 0.25%. Principal and interest only. Actual pricing varies by lender.
To save the buyer that same $670 a month with a price cut, the seller would need to come down about $123,000.
A price cut does save the buyer $8,000 at closing. For a buyer stretching on the monthly payment, though, the payment is usually the number that decides it.
When it makes sense
A buydown is a tool for the right moment. If there are multiple offers on the table, the seller doesn't need to give anything. It works well when the home has been sitting, a buyer is interested but the price and payment is holding them back, and the seller would rather protect their price than reduce it publicly. Buyers can ask for one in their offer, too.
Two ways to do it
The right choice comes down to one question: how long do you expect to keep this loan?
If you plan to keep it for years, a permanent buydown lowers the rate for as long as you have the loan. This is what our example above shows.
If you think rates will come down, a temporary buydown gives you a lower rate for the first year or two. The most common version, called a 2-1, lowers the rate by 2% in year one and 1% in year two, then returns to the full rate.
This is where it gets interesting. With a temporary buydown, the seller's money sits in an account and is used month by month. If rates drop and you refinance before it runs out, the leftover money typically goes toward paying down your loan. The seller's credit keeps working for you, even after the original loan is gone.
A few things to know
How much a seller can contribute depends on the loan and the down payment. Your lender will confirm what's allowed.
The credit is written into the purchase contract and negotiated like any other term.
What a buydown costs changes with the market, so your lender will price the exact rate.
Whether you're buying or selling, we're always happy to run the numbers with you and see if it helps you reach your goal.
This post is for general information and isn't financial or lending advice.
