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- Buyers love interest rate buydowns because they come with reduced interest on their mortgage.
- In an unpredictable market, sellers can also benefit from them, even if it costs some money.
- It’s best to make sure an interest rate buydown is part of the initial offer.
These days, high mortgage interest rates can mean paying hundreds of extra dollars a month for housing. That has led to an uptick in interest rate buydowns — money paid upfront to secure a lower interest rate. And it’s not just buyers who are keen — some homeowners are offering seller buydowns to entice more shoppers to consider their homes. Temporary buydowns (including the popular 2-1 buydowns) are especially popular right now.
“A seller buydown is when a seller provides concessions, also known as a credit, to a borrower,” to purchase a lower interest rate, explains Ernest Jones Jr., board president of the The National Association of Mortgage Brokers. Jones saw interest rate buydowns increase last year, particularly in the second half of 2022.
The benefit to the buyer is clear: They’ll pay a lower interest rate either temporarily, or for the life of the loan, potentially saving thousands of dollars. But interest rate buydowns can also be good for sellers even if buydown points come at a cost.
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Your estimated monthly payment
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 each month would reduce the loan length by 146 months
“The benefit to the seller is helping homebuyers feel confident with purchasing a home in a market where mortgage rates are higher than consumers are used to,” says Raul Hernandez, a broker with Competitive Home Lending. “This allows sellers to attract homebuyers today instead of waiting for rates to drop.”
Whether you’re looking to sell your home quickly or get a better rate on your mortgage, here’s when you should consider an interest rate buydown.
Temporary buydowns vs. permanent buydowns
Interest rate buydowns can be permanent over the life of the loan. But more commonly, they give a temporary reprieve from high interest rates. The temporary option is popular right now because it’s more affordable, and many experts expect interest rates to be lower in three years, says Steve Hill, lead mortgage broker for SBC Lending.
“Homebuyers can have a lower payment for two years and ideally be able to refinance right as rates are coming down in the future,” Hill says.
Many people opt for a 2-1 buydown. This lowers interest by two points during the first year and one point during the second year. After that, interest returns to the original rate.
“The seller is essentially ‘helping’ the homebuyer with their first two years of mortgage payments,” Hill says.
There are other options available though, so it’s best to walk through a few different choices.
Buydown points are a cost worth considering
A major downside to seller buydowns is that they’re expensive. To lower interest, you must buy “points.” To lower the interest rate permanently, each point costs 1% of the loan and usually lowers the interest rate by 0.25%.
The cost of a 2-1 buydown varies, but it’s generally around 2.3% of the purchase price. That means a seller buydown can easily cost $15,000 to $20,000, Hill says. As the seller, that cash comes directly out of your profit at closing. You can use an interest rate buydown calculator to figure out that cost.
Saying goodbye to a slice of profit is unappealing. However, there is an upside. In an unpredictable real estate market there’s a strong incentive to close deals now rather than gambling on what might happen to house prices in the future.
“A seller buydown is a huge marketing and negotiating tool,” Hernandez says.
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An interest rate buydown should be part of an offer
Technically, interest rate buydowns can be done any time before closing. However, it’s usually best for buyers to consider seller buydowns as part of the initial offer. “You don’t want to get into contract, and then two weeks in, ask the seller,” Hill says.
Instead, make sure that any seller buydowns are clearly outlined in the purchase contract. That’s a legally binding document that both buyer and seller must adhere to.
As a seller, deciding whether to offer an interest rate buydown is a big financial decision. You want to make sure that you’re not offering a concession if you don’t need it — but if your house has been sitting on the market, this can be a powerful tool. Talking with a mortgage broker can help you determine the best option for offering a buydown that will help you sell your home quickly, while also retaining as much of your profit as possible.