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

A Seller-Paid Rate Buydown: What It Is and How It Works

A seller-paid rate buydown is a mortgage-rate relief that hopeful homebuyers can ask for. The seller pays to lower the buyer's mortgage rate, making the home more affordable. This can be a powerful marketing tool for sellers who want to attract more buyers and drive interest to their listing.

There are two types of rate buydowns: permanent and 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. This can be a significant cost savings for the buyer, but it also means that the buyer will be locked into the lower interest rate for the life of the loan.

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.

Pros and Cons of a Seller-Paid Rate Buydown

A seller-paid rate buydown can be a great incentive for buyers, but it's not without its drawbacks. Here are some pros and cons to consider:

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.
• 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.

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.