Seller-paid rate buydown: How it works and how to ask for one

A seller-paid rate buydown may be the mortgage-rate relief that hopeful homebuyers are looking for. Few house hunters might imagine the seller coming to their rescue, but it’s possible, and in some real estate markets, even likely. Here’s how.

How a concession to buy down an interest rate works

When marketing a home-for-sale listing, sellers often need to generate more interest. That’s where open houses, advertising, and price reductions come into play. There are also seller concessions. Those are cash or closing-cost credits issued by the seller and used as incentives for potential buyers.

A rate buydown is a powerful marketing tool where the seller pays to lower the buyer’s mortgage rate.

➡ Read more: Seller concessions vs. credits

There are two seller-paid rate buydowns: permanent and temporary

Rate buydowns can be either permanent or temporary.

A permanent seller-paid rate buydown is when the seller buys discount points to lower a buyer’s mortgage rate for the life of the loan. 

“If the seller is a builder, developer, or has other properties in the area, they may choose to offer a rate buydown versus a price cut, in order to maintain values and comps for their other properties,” Lindsey Harn, of the Lindsey Harn Group in San Luis Obispo, California, told Yahoo Finance. “Sometimes sellers also want to keep the comps high for their neighbors, or simply be stuck on hitting a certain sales price for their home.”

A temporary seller-paid rate buydown lowers the buyer’s mortgage rate only for a specified time. The seller makes a cash contribution to the mortgage escrow account to fund the temporary rate cut. For example, a 2-1 buydown lowers the rate by 2% in the first year and 1% in the second. For the third year and the remaining term of the loan, the borrower will pay the issued mortgage rate. 

“As a buyer, a temporary rate buydown can be great if you expect your income to increase over the next two to three years,” Harn said. “However, as a buyer, if you think rates are going to drop and you are going to want to refinance in the next two to three years, the funds spent on the rate buydown can be a ‘waste’ of money.”

➡ Read more: Temporary vs. permanent rate buydown

How to ask a seller to buy down your interest rate

Negotiating the purchase of a home will fall to your buyer’s agent. However, if you’re interested in exploring a seller-paid rate buydown, it’s worth asking your agent if the local real estate market is prone to such seller concessions. It’s also not a bad idea to get a second opinion or two.

If you’re seeing other listings similar to the one you’re pursuing that promote buydowns, press the matter with your agent, politely, of course. Some agents are better than others at negotiating a deal. 

If you’re a hands-on negotiator, make sure you:

Have a mortgage preapproval in hand. 

Have researched your local real estate market. A buyer’s market is more conducive to seller concessions, such as rate buydowns. 

Know the cost of the buydown you’re proposing by talking to your lender.

Have your real estate agent put the specific buydown details in your purchase agreement or counteroffer.

Pros and cons of a seller buying down your interest rate

Pros

A lower interest rate can enhance the affordability of a home purchase.

A seller-paid rate buydown may be more valuable to a buyer than a price cut on the house. Use a mortgage payment calculator to run various scenarios. 

Even a temporary buydown can help new buyers transition to homeownership by providing a budget cushion for moving expenses, furniture, or home improvements.

Cons

A temporary buydown might put you in a budget squeeze when the higher interest rate kicks in to your monthly payment.

A permanent buydown lowers only your interest rate. A price cut of an equal amount may also lower your property taxes.

Depending on the type of loan, there are limits to seller concessions, most commonly ranging from 3% to 6%, though up to 9% on conventional loans with more than 25% down.

Seller-paid rate buydowns FAQs

How much does a 1% rate buydown cost?

One discount point generally reduces a mortgage rate by about 0.25%, so for a life-of-the-loan 1% reduction in the interest rate, four discount points would be required. That would equal 4% of a home’s purchase price. For example, on a $400,000 home, four discount points would cost $16,000.

What does a 2% buydown mean?

A 2% buydown can be either a permanent or a temporary interest rate reduction. A seller may offer to lower the buyer’s mortgage rate by 2% for the first year, such as in a 2-1 buydown, or for the life of the loan. 

Why would a seller agree to a 2:1 buydown?

A seller can generate more buyer leads by offering a temporary rate buydown. This is particularly useful in a buyer’s market, where there are more homes for sale than there is demand. 

➡ Read more: Understanding housing inventory

Who benefits most from a rate buydown?

Under the right circumstances, both the buyer and seller can benefit. A buyer can get a lower mortgage rate, and the seller can drive more interest to their listing — and perhaps do it at a lower cost than reducing the asking price.