Why Buyers Expect a Deal
First, let’s set the stage on why some compromise may be necessary in today’s market.
In September, Redfin says there were 63% more sellers than buyers in the market. And with so many sellers active and relatively few buyers by comparison, those purchasers are realizing they have more power. And as mortgage rates continue to put a squeeze on their budgets, they’re leaning in and using it.
One of the most common negotiation points? The price.
That’s because they want to feel like they’re getting a deal and they want to see their monthly payment drop. And since buyers can’t control rates, the price feels like the most obvious lever to pull.
But the savviest sellers realize being flexible doesn't always mean a lower price, paying for a buyer's rate buydown might work better.
What Is a Rate Buydown?
A buydown is money paid at closing to lower the buyer's mortgage rate. When you pay it as the seller, you are paying some of the buyer's interest ahead of time, so the buyer gets a lower rate and monthly payment. And that’s especially appealing to today’s buyers.
Temporary buydowns lower the rate for the first few years, then it goes back to the full rate. The more years a buydown covers, the more it costs. These work well for buyers who expect to refinance within a certain amount of time.
A permanent buydown lowers the rate for the whole loan. These are paid for with "discount points." One point costs 1% of the loan. According to FICO, each point generally lowers the rate by about a quarter of a percent. This type of buydown works well for buyers who plan to stay in the home for a long time.
Same Money, Different Results
And here’s why these can be a win-win for both buyers and sellers. Rate buydowns help sellers stand out in a crowded market and they can have a bigger impact on your buyer than a price cut would.
Here’s an example to show you what that could look like.
Let’s say you’re willing to make a $10,000 concession to help get the deal done. Take a look at these three ways to spend that money and the impact they could have on a buyer’s $420,000, 30-year fixed loan at 7%:
It's the same $10,000 from the seller. But a 2-1 buydown saves the buyer about eight times more each month in the first year.
And since most buyers shop by monthly payment, that’s what grabs their attention.
That's what makes a rate buydown worth considering. Instead of reducing your asking price, you may be able to use that same money to have a bigger impact on your buyer’s monthly payments. And depending on what matters most to that buyer, the immediate savings could be more appealing than a price reduction.
The key is working with your agent and the buyer's lender to compare the options and see which one makes the most sense.
Things To Know
Loan programs cap how much a seller can pay toward a buyer's costs.
Money toward buydowns doesn’t limit what else a buyer may ask a seller to pay for. Buyers may still ask for repairs or other concessions.
Putting the buydown offer in your listing lets agents and buyers know it’s an option.
Your agent can run scenarios on buydowns and other costs of selling in advance so you’re prepared when an offer comes in.
As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:
“Home sellers need to be realistic about local market conditions, which could require price discounts and other incentives to attract buyers.”
And sellers who offer solutions like buydowns can make meaningful impact where home buyers need it most: in their wallets.
Bottom Line
When you're looking for ways to make your house more appealing to buyers, a price reduction isn't your only option. A mortgage rate buydown could help a buyer save more each month, especially in the early years of their loan.
Talk to your agent or a trusted lender which incentives could make the biggest difference for buyers in our market, while still protecting your bottom line.
