A Seller’s Guide to Buying Down the Interest Rate for Buyers
Thinking about buying down the interest rate for your buyer? Learn how this seller-paid strategy works, how much it costs, and when it can help you sell faster.
If you’re finding it difficult to sell your home in the current market, buying down the interest rate for buyers may be a solution. By helping reduce the buyer’s loan rate — at least temporarily — you can make your property more attractive without lowering your asking price.
With insights from a top expert, this guide will show you how seller-paid buydowns work, how much it may cost you, and when it makes sense to consider offering this concession to close a deal.
Ask a Top Agent if You Should Offer a Rate Buydown
Sellers can often retain more proceeds by offering a buyer an interest rate buydown rather than lowering their home’s sale price. A top agent can determine which strategy is best for your situation. Our free Agent Match tool analyzes over 27 million transactions and thousands of reviews to find you a trusted, experienced local agent.
What is a seller-paid interest rate buydown?
“In simple terms, a seller-paid interest rate buydown is when the seller contributes funds to lower the buyer’s mortgage rate, which results in lower monthly payments for the buyer,” says Denise Madan, a Miami-based HomeLight Elite agent with 26 years of experience helping sellers.
This strategy can be especially effective in a slower market where buyers are feeling stretched by high rates and prices. Instead of lowering your home’s sale price, which can reduce your net proceeds, you’re offering a benefit that directly addresses buyers’ monthly payment concerns, especially in the early years of the loan.
How does buying down the interest rate work?
When a buyer pays for an interest rate buydown on their own mortgage loan, the upfront discount points each typically cost 1% of the loan amount and can lower the rate by a fraction of a percentage, usually about .25%. However, when a seller offers a buydown as a buyer incentive, it’s typically in the form of a credit at closing.
The funds you contribute as a seller are used to subsidize the difference between the original interest rate and the reduced rate during the buydown period. Lenders typically require that this money be placed in an escrow account to cover the buyer’s adjusted payments. (We’ll illustrate this in a minute.)
Temporary and permanent rate buydowns
A rate buydown can be structured in two main ways: temporary or permanent. Both approaches lower the interest rate but differ in how long the reduced rate lasts and how much the buydown costs.
“A temporary buydown reduces the interest rate for the first couple of years before it returns to the original rate,” Madan explains. “There is a 2-1 buydown, which means the interest rate is reduced by 2% in the first year and 1% in the second year.”
2-1 buydown interest rate example:
- Year 1 rate: 4.5% (buyer pays a lower monthly payment)
- Year 2 rate: 5.5% (buyer pays a slightly higher monthly payment)
- Year 3 rate: 6.5% (buyer pays a monthly payment based on the original rate)
Madan says temporary buydowns are more typical in buyer-seller negotiations. “In my experience, I haven’t seen sellers offer permanent buydowns.” (This is more commonly offered by homebuilders.)
Compare: Reducing home price vs. a 2-1 buydown
Home sellers feeling stuck in a slow, high-interest-rate market may be tempted to lower their asking price, thinking this is the only way to attract offers. Let’s take a look at how lowering your home’s price might compare with using a 2-1 buydown as a buyer incentive.
Option A: Reducing your home’s price
1. Your buyer agrees to a sale price of $420,000 with a 5% down payment.
2. This results in a $399,000 loan and a monthly payment of $2,522 on a 30-year fixed-rate mortgage (assuming a 6.5% mortgage rate and excluding taxes, home insurance, and PMI).
3. The monthly payment is slightly higher than your buyer’s pre-approval amount. If you don’t have other offers, you drop your asking price by $20,000.
4. Assuming the same 5% down payment, this reduces the buyer’s loan to $380,000, giving them a mortgage payment of $2,402, which is within your buyer’s approved range.
»Result: Your price reduction strategy reduces your proceeds by $20,000.
Option B: Offering your buyer a 2-1 buydown credit
1. You keep the original $420,000 asking price but offer your buyer a 2-1 buydown.
2. The buyer maintains a $399,000 loan with 5% down.
3. You pay a credit of around $8,500 from your proceeds to reduce the buyer’s rate for the first two years.
»Result: Your 2-1 buydown strategy lets you keep $11,500 more in proceeds.
