Seller-Paid Buydowns

Want a significantly lower monthly mortgage payment without permanently paying for discount points? A seller-paid buydown is a strategic negotiation option where the seller pays a lump sum upfront to temporarily lower your interest rate for the first few years of your loan.

In a competitive market, it is a win-win situation: the buyer gets affordable payments right out of the gate, and the seller makes their property highly attractive to a larger pool of buyers.

How Temporary Buydowns Work:

The most common structures are the 2-1 and 3-2-1 buydowns. The seller’s funds are held in an escrow account and used to subsidize your monthly payment.

• 2-1 Buydown: Your interest rate is reduced by 2% the first year, and 1% the second year. By year three, you pay the standard, full-note interest rate.
• 3-2-1 Buydown: Your rate drops by 3% the first year, 2% the second year, and 1% the third year. In year four, you return to the standard rate.

The Benefits for Buyers:

• Breathing Room: Lower payments in the first few years free up cash for moving expenses, furniture, or renovations.
• Income Growth: It is perfect if you expect your income to increase by the time the standard rate kicks in.
• Savings: You save thousands of dollars in interest during the buydown period.

The Disadvantages:

• Payment Shock: You must be absolutely certain you can afford the full monthly payment once the buydown period expires.
• Purchase Price: Sellers might refuse to drop the asking price if they are shelling out cash to fund your buydown.
• Qualification: Lenders will still qualify you based on the full, un-discounted note rate to ensure you can afford the loan long-term. You still need strong credit (typically 620+) and a solid debt-to-income ratio.

If you want to ease into your new mortgage payments, ask your real estate agent to negotiate a seller-paid buydown into your next offer.

Seller-Paid Buydown FAQ

Who pays for a buydown?

Typically, the buyer or the seller pays for a buydown. Sometimes it can also be a third party. The specifics can vary depending on the agreement between the parties involved.

What are the cons of a buydown?

The main downside of buydowns is the upfront cost, which can be significant. A buydown may also not be beneficial if the buyer plans to sell or refinance soon after the purchase.

How does a seller buydown work?

A seller buydown happens when the home seller pays a lender to lower the interest rate on the buyer’s mortgage for a period. This is typically done to speed up the sale or offer a competitive advantage in a busy market.

Why would a seller pay for a buydown?

A seller might pay for a buydown to make the property more appealing to buyers by providing lower monthly payments in the early years. This can speed up the sale process and potentially result in a higher selling price.