At a time when mortgage rates are expected to stay higher for longer than previously thought, home shoppers may be able to lock in better terms with an interest rate buydown. And if you’ve been in the market for a home, you might have noticed a trend: many sellers are advertising homes with competitive mortgage rates, offering to buy down the rate as a seller concession or builder incentive.
A seller-paid rate buydown can typically help buyers save more money on monthly mortgage payments than if they negotiated a lower purchase price. It can also be cheaper for the seller to pay for discount points or a temporary rate buydown than to reduce the home price.
While rate buydowns can be a thrifty way to close the deal, they do come with their risks. Here’s what you need to know about seller-paid discount points, so you can decide if this strategy can help you buy or sell a home this year.
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How Seller-Paid Mortgage Rate Buydowns Work
A seller-paid rate buydown is when the seller offers concessions or incentives that reduce the buyer’s mortgage interest rate, either for the duration of the loan or just for the first few years.
Buyers may have better luck getting this concession in the new construction home market, with homebuilders commonly advertising temporary or permanent rate buydowns as an incentive. Nearly 60% of builders are offering incentives — such as reduced mortgage rates — according to a May 2024 report from the National Association of Home Builders.
Mortgage rate buydowns typically happen in one of two ways: The seller contributes to the buyer’s closing costs via discount points, or the seller pays for a temporary rate buydown.
Option 1: Permanent Mortgage Rate Buydowns
With a permanent rate buydown, the seller pays a portion of the buyer’s closing costs that are used toward buying mortgage discount points. Some homebuilders will advertise permanently reduced mortgage rates on new construction homes, but they may only buy down your rate if you use their preferred mortgage lender.
Each discount point reduces the rate by about 0.25 percentage point, depending on the lender, and costs 1% of the loan amount. So if you buy a $500,000 home with a 20% down payment, your mortgage amount would be $400,000, and each point would cost $4,000.
Here’s how mortgage points might impact your monthly principal and interest payment and loan costs over 10 years using our mortgage calculator:
| Mortgage Interest Rate | Monthly Principal and Interest Payment | Upfront Cost to Seller | Savings to Buyer Over 10 Years | |
| 0 Points | 6.5% | $2,528 | $0 | $0 |
| 1 Point | 6.25% | $2,463 | $4,000 | $10,084 |
| 2 Points | 6% | $2,398 | $8,000 | $20,133 |
| 3 Points | 5.75% | $2,334 | $12,000 | $30,145 |
| 4 Points | 5.5% | $2,271 | $16,000 | $40,118 |
Keep in mind that, with the popular 30-year mortgage term, the vast majority of homeowners will sell or refinance their home well before then, while others will make extra principal payments to get out of debt faster. So when it comes to permanent rate buydowns, consider your long-term plan and find the break-even point — that is, how long it would take you to save enough money to outweigh the money spent on buying points.
One last caveat: Depending on the type of mortgage you borrow, there are limits on how much the seller can pay toward your closing costs. For Federal Housing Administration and U.S. Department of Agriculture loans, the seller can contribute up to 6% of the total loan amount, while the cap is 4% for VA loans. With conventional loans, the cap varies based on the size of the down payment.
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Option 2: Temporary Mortgage Rate Buydowns
Another option is the temporary rate buydown, which lowers the buyer’s mortgage rate for the first few years of the loan. The cost of a temporary buydown is equal to the amount that the buyer would save over the reduced-interest period, which essentially makes it a way for the seller to prepay interest on the buyer’s behalf.
Temporary rate buydowns spiked in popularity in December 2022, when 7.6% of Freddie Mac-funded mortgages included this feature. Although temporary buydowns were less prevalent in 2023, they’re still more common than they were in 2021, when mortgage rates were at record lows.
Here are a few common types of seller-paid rate buydowns and examples of how they stack up to the discount point model above:
With a 1-0 buydown, the mortgage rate and monthly payments are lower for the first year of the loan, rising for the second year of the loan and onward.
— Year 1: 5.5% mortgage rate with a $2,271 monthly payment.
— Years 2-30: 6.5% mortgage rate with a $2,528 monthly payment.
— Total savings for buyer/cost to seller: $3,085.
With a 2-1 buydown, the mortgage rate and monthly payments are reduced for the first year of the loan and rise in the second year, reaching the terminal rate in the third year.
— Year 1: 4.5% mortgage rate with a $2,027 monthly payment.
— Year 2: 5.5% mortgage rate with a $2,271 monthly payment.
— Years 3-30: 6.5% mortgage rate with a $2,528 monthly payment.
— Total savings for buyer/cost to seller: $9,104.
With a 3-2-1 buydown, the mortgage rate and monthly payments are lower for the first year of the loan, rising in the second and third years, before reaching the terminal rate in the fourth year.
— Year 1: 3.5% mortgage rate with a $1,796 monthly payment.
— Year 2: 4.5% mortgage rate with a $2,027 monthly payment.
— Year 3: 5.5% mortgage rate with a $2,271 monthly payment.
— Years 4-30: 6.5% mortgage rate with a $2,528 monthly payment.
— Total savings for buyer/cost to seller: $17,889.
Temporary rate buydowns may be a better option for buyers who plan on selling or refinancing their home within a few years, while permanent buydowns can be a good choice for those who are buying their forever home.
It also depends on how much money the seller is willing to contribute in buying down the mortgage rate. And just be sure that you can afford the final monthly payments once the buydown period expires.
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The Benefit of Seller-Paid Rate Buydowns
Often, a mortgage rate buydown is mutually beneficial for the buyer and the seller. It can be cheaper for the seller to help pay for discount points rather than to budge on the purchase price — and it can also save the buyer more money on monthly mortgage payments and over the life of the loan. See an example of how a rate buydown compares with a price reduction in the table below:
| Price Reduction of $25K | Seller-Paid Discount Points | 2-1 Rate Buydown | |
| Purchase Price | $475,000 | $500,000 | $500,000 |
| Down Payment Amount (20%) | $95,000 | $100,000 | $100,000 |
| Loan Amount | $380,000 | $400,000 | $400,000 |
| Mortgage Rate | 6.5% | 5.75% | 4.5% in first year, 5.5% in second year, 6.5% in third year and beyond |
| Cost to Seller | $25,000 | $12,000 | $9,104 |
| Monthly Principal & Interest Payment | $2,402 | $2,334 | $2,027 in first year, $2,271 in second year, $2,528 in third year and beyond |
| Lifetime Interest Paid by Buyer | $484,669 | $440,345 | $501,074 |
In the example above, the homebuyers would be able to save an additional $67 on their monthly payment and pay nearly $45,000 less in interest over the life of the loan if the sellers paid for discount points than if they reduced the purchase price. And the sellers would save $13,000 by buying down the rate instead of dropping the price.
In the case of a temporary rate buydown, the buyers can benefit by saving on interest in the short term but will pay more interest over the course of a 30-year mortgage. The monthly payments will be lower for the first two years of the loan, while rising to the nondiscounted rate for the remainder of the term.
The Risk of Seller-Paid Rate Buydowns
Despite the financial benefits, rate buydowns may not be the best way to get seller concessions. The money a seller would pay toward discount points may be better used toward other closing costs or home repairs instead. Additionally, the current volatility in mortgage rates puts those who buy down their rate in a “dangerous spot,” says Taylor Marr, deputy chief economist at Redfin.
“You’re placing a bet that rates aren’t going to fall dramatically,” Marr says.
If rates are on a downward trend, it may pay off to negotiate a lower purchase price and refinance to a reduced rate down the line. That way, you have a smaller loan amount and the opportunity to lock in a lower rate when market conditions are in your favor.
You may also decide to wait until rates fall to buy a home, although that can also be a gamble. It’s not advisable to try to time the housing market, since no one knows for certain where rates and home prices are headed.
Alternative Seller Concessions to Consider
Rate buydowns can be a good tool to bridge the affordability gap when mortgage rates are high, but they’re not your only bargaining chip. Besides asking for a seller-paid rate buydown, there are several other types of seller concessions that are worth exploring:
— Lower purchase price. While negotiating the purchase price may not save you much money on your monthly payments, it will reduce your loan amount — and, by extension, your down payment.
— Money toward other closing costs. The seller may agree to cover a portion of the closing costs, and that contribution doesn’t necessarily need to be used for discount points. It can be used for other upfront expenses like prepaid interest, property taxes, loan origination fees and title insurance, for example. Remember that there are limits to how much a seller can contribute toward closing costs.
— Cash for home repairs. If you’re buying a home that needs a bit of TLC, the seller may be willing to contribute money toward repairs at closing.
— Purchase contingencies. While many buyers waive contingencies to get their offer accepted in a hot market, it’s possible to include home inspection, financing and appraisal contingencies when there’s less competition. That way, if the deal fails through no fault of your own, you don’t risk losing your earnest money.
When making a decision about rate buydowns, think about what you want out of a home (and your mortgage). If getting a low rate is a top priority, then a seller-paid buydown can help you achieve that. But if you plan on refinancing to a lower rate, then mortgage discount points may not be worthwhile — although a temporary rate buydown can still help you save money in the near term. Be sure to discuss your options with your real estate agent when putting together a competitive offer.
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A Guide to Seller-Paid Mortgage-Rate Buydowns originally appeared on usnews.com
Update 05/17/24: This story was previously published at an earlier date and has been updated with new information.
