What are Seller Buydowns?

“Seller Buydown” seems to be a very trendy phrase these days since interest rates have moved higher. There are a couple different types of Seller Buydowns that help make homes more affordable for potential home buyers.

The classic seller buydown one where the seller helps to reduce a buyers interest rate by contributing funds (typically from the proceeds of the sale of the home) to “buy” the buyers interest rate down. This type of buydown is helps the buyer have a lower rate for the life of the loan. This type of buydown allows a buyer also to qualify based on that lower interest rate.

Temporary buydowns are a little different as the interest rate for the buyer will adjust annually and qualifying for the mortgage is based on the actual note rate. Probably the most common buydown is a 2-1 Buydown. With this, the first year of the payment is based on a rate that is 2 percentage points lower than the note rate. The next year, the interest rate adjusts up one more point so that the rate one percentage point lower than the note rate. The third year and remaining term, the payment is based on the actual note rate. The seller’s cost for a temporary buydown is basically the difference in the payment between the buydown payment and the actual note rate payment. The seller is effectively paying for that portion of the payment. The funds used for the temporary buydown are held in the lender’s escrow account. IF a buyer ends up refinancing before the buydown period is over, then the balance of those buydown funds are credited to the payoff of the principal balance.

There are also 3-2-1 Seller Buydowns where the payment rate starts off 3 points lower than the note rate for the first year; 2 points lower for the second year, 1 points lower for the 3rd year and at the 4th year and remaining term, the payment is based on the note rate.  And 1-1 buydowns as well.

Often times, a buydown may make more sense than asking a seller to reduce the sales price. The impact of buying down the interest rates typically produces a much lower total monthly mortgage payment than a reduction to the sales price and loan amount.

Bottom line, it’s important to know your options and to review all possible scenarios so you can make a decision that’s best suited for your financial needs.

If you’re considering buying or refinancing a home, I’m happy to help you!

PS: Home sellers in Washington state, I’m also happy to run numbers for you so you can see how buydowns work. It could be well worth your time to offer a buydown to potential home buyers to help make your listing stand out!

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