With rates sitting at 7.40%, I'm seeing a lot of buyers do what feels like the obvious thing when they write an offer: ask for a lower price. And that's not wrong. But in this rate environment, it's often not the best use of the seller's money either.
Let me show you why, with real numbers.
The setup
Say you're buying a $500,000 home with 10% down, so your loan is $450,000. At 7.40%, your principal and interest is about $3,116 a month.
Now let's say the seller is willing to give up $10,000 to get the deal done. You have a few options for how to use it.
Option 1: Take the $10,000 off the price
Your price drops to $490,000 and your loan drops to $441,000. Your new payment? About $3,053 a month.
That's a savings of about $62 a month. It's not nothing, and it does lower your property taxes a bit, but it's not exactly life-changing either.
Option 2: A temporary 2-1 buydown
This is where it gets interesting. With a 2-1 buydown, the seller's money goes into an account that subsidizes your payment for the first two years:
- Year 1: your rate is 2% lower (5.40%), so your payment is about $2,527. That's $589 a month less.
- Year 2: your rate is 1% lower (6.40%), so your payment is about $2,815. That's $301 a month less.
- Years 3 to 30: you pay the full note rate of 7.40%.
The cost of this buydown is the total of those monthly savings, which works out to about $10,700, almost exactly what our seller was willing to give.
What gives? Why would you want a payment that goes back up? Because it gives you breathing room during the most expensive stretch of homeownership (furnishing, fixing, and getting settled), and if rates come down during those two years, you may be able to refinance before you ever pay the full rate. If you do refinance or sell early, the unused buydown money typically gets applied to your loan balance, so it isn't lost.
One important note. You still have to qualify at the full 7.40% payment. The buydown makes your life easier, but it doesn't help you qualify for a bigger loan, and I'd never want anyone buying a house they can only afford at the bought-down rate.
Option 3: A permanent buydown
Instead of a temporary break, the seller's $10,000 can also be used to pay 'discount points' (prepaid interest) to lower your rate for the life of the loan. Pricing varies day to day, but a common rule of thumb is that each point (1% of the loan amount, or $4,500 here) lowers your rate by somewhere around a quarter of a percent.
So $10,000 might get you from 7.40% down to somewhere in the high 6's, which saves roughly $150 to $170 a month, every month, for as long as you keep the loan. That's more than double the savings of the price cut, and it doesn't go away after two years.
The catch? If you refinance in a year or two, you'll have paid for a lower rate you didn't use for very long. The break-even point (how long it takes for the monthly savings to pay back the cost) is usually somewhere in the 5 to 6 year range, so this option makes the most sense if you think you'll keep the loan for a while.
So which one is best?
It depends on your plans, but here's how I'd think about it:
- $10K price cut: monthly savings about $62, lasts for life of loan, best for buyers who want a lower tax base and a little cushion on value.
- $10K 2-1 buydown: monthly savings about $589 then about $301, lasts 2 years, best for buyers who expect to refinance if rates drop, or who want breathing room early on.
- $10K permanent buydown: monthly savings about $150 to $170, lasts for life of loan, best for buyers who plan to keep the loan long term.
How much can a seller contribute?
There are limits, and they depend on your loan type. On a conventional loan, the seller can contribute up to 3% of the price if you're putting less than 10% down, 6% if you're putting 10% to 25% down, and 9% if you're putting down more than 25%. FHA and USDA allow up to 6%, and VA allows up to 4% (with some exceptions for normal closing costs). On our $500,000 example with 10% down, that's up to $30,000 the seller could put toward your closing costs and rate combined.
Bottom line
In a high-rate market, a dollar of seller money is usually worth more to you as a rate reduction than as a price reduction. That being said, every deal is different, so before you write your next offer, give me a call and I'll run all three options side by side with the actual pricing for that day. It takes me about 10 minutes, and it can make a big difference in what you ask for.
Example is for illustration only and is not a loan quote. Payments show principal and interest only on a 30-year fixed loan with 10% down and do not include taxes, insurance, or mortgage insurance. Discount point pricing varies daily and by borrower. Temporary buydowns are not available on all loan programs, and borrowers must qualify at the full note rate.
Want this run on your actual numbers?
Everything above is a worked example. Give me your real figures and I'll tell you what it looks like for you, with no application and no credit pull.