Seller-Paid Rate Buydown

What is a seller-paid rate buydown?

Updated January 31, 2023

With the Fed raising interest rates, mortgages have gotten significantly more expensive for the average buyer. To make up for these rising costs, sellers and buyers are getting creative. One option available is a seller-paid rate buydown, wherein sellers pay down points to lower the mortgage rate for purchasers. The upside to this: Buyers can pay a lower rate for a few years and sellers can avoid having to make a price reduction on the cost of the home.

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What is a seller-paid rate buydown?

In markets favoring buyers—or markets with rising interest rates—sellers will sometimes offer a seller-paid rate buydown, which is closing cost credit that helps lower the cost of the monthly mortgage payments for the buyers.   

Let’s say your house is on the market for $600,000. The market is slow, and there aren’t many prospective buyers out there that have seemed interested. You don’t want to cut the asking price to $580,000 because it can significantly reduce your profit. But, you could give the buyer a $20,000 incentive that will lower their interest rates or cover closing costs.               

How does a seller-paid rate buydown benefit the seller?

Raised interest rates can cause price reductions on a seller’s home. A buydown is one way sellers can avoid this. It might be cheaper for them to help pay for mortgage or discount points instead of cutting the asking price of their home. A seller offering a buydown may also stand out among the competition and entice buyers. 

How does a seller-paid rate buydown benefit the buyer?

Buyers can take advantage of lower mortgage rates for a short or long period. Securing a lower mortgage rate promotes affordability and reduces monthly mortgage costs. 

What is a temporary buydown vs. a permanent buydown?

Buydowns can be temporary or permanent and can be applied to fixed-rate or adjustable-rate mortgages. In the case of a permanent buydown, that interest rate relief will happen throughout the full loan term (usually 15 or 30 years). A temporary buydown lowers that rate for a specific number of years—often two, in what’s known as a 2-1 buydown.