What Is a Mortgage Rate Buydown, and Who Should Pay for It?

A rate buydown is money paid up front to lower a buyer's mortgage interest rate. It can be temporary (lower payments for the first year or two, like a "2-1 buydown") or permanent (discount points that lower the rate for the life of the loan). It can be paid by the seller as a concession, by the lender as part of a program, or by the buyer. Sometimes it makes more sense than a price reduction. Sometimes it doesn't.

How is a buydown different from a price cut?

A price cut lowers the loan amount a little. A buydown lowers the monthly payment more directly. For a buyer whose problem is the monthly payment, a seller-paid buydown can do more than the same dollars taken off the price.

When rates are high, buydowns come back into the conversation. A lender partner and I talked about exactly this before an open house this fall: there are lender-paid and seller-paid options, and sometimes they make sense and sometimes they don't. The only honest way to know is to run the numbers for the specific buyer.

When does a seller-paid buydown make sense?

• The home is priced right but buyers are stretching on the monthly payment.
• The seller wants to protect the sale price (for appraisal, or for the neighborhood's comps).
• The buyer plans to stay long enough for a permanent buydown to pay off, or needs breathing room in the first years.

When doesn't it?

• The home is overpriced. A buydown won't fix a price that doesn't compete. Fix the price first.
• The buyer will refinance soon. Paying for a permanent rate reduction and then refinancing wastes the money.
• Loan limits get in the way. How much a seller can contribute depends on the loan type and down payment. Your lender will tell you the limit.

How do you compare the options?

Ask the lender for a side-by-side for the same buyer:

1. The monthly payment with a price reduction of X.
2. The monthly payment with a seller-paid temporary buydown costing X.
3. The monthly payment with a permanent buydown costing X.
4. How long the buyer has to keep the loan for the permanent option to come out ahead.

Then decide with real numbers in front of you.

Questions people actually ask.

What is a 2-1 buydown?

A temporary buydown where the rate is 2 percentage points lower in year one, 1 point lower in year two, then the full rate from year three on. The cost is paid up front, often by the seller.

Is a buydown better than a lower price?

For the monthly payment, often yes. For the buyer's equity and the appraisal, a lower price can be better. It depends on the buyer's goals and how long they'll keep the loan.

Can a seller offer a buydown in the listing?

Yes. Sellers can advertise that they'll contribute toward a buydown. Work out the details with the buyer's lender once there's an offer.

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This article is general information about Massachusetts real estate, not legal, tax, or financial advice. Every property and transaction is different. For advice on your situation, talk with me and, where appropriate, an attorney, lender, or tax professional.