A Seller Buydown is a permanent rate reduction mortgage that lowers the buyer’s rate and payment and is paid for by the seller.
In a purchase transaction, the Seller Buydown process involves a seller contributing a financial credit (seller’s concession) towards the buyer’s cost of obtaining a below-market mortgage rate. Common reasons for this are getting the lowest possible mortgage payment possible, improving affordability, increasing the purchase price range, or lowering rates on Non-QM or investor loan programs.
The best market conditions for the Seller Buydown to be most effective is when there is a balance in supply and demand that favors the buyer due to competition in listing inventory. This scenario allows the buyer and agent to negotiate with the seller for a Seller Buydown versus a price drop.
Higher rates bring the Seller Buydown more into focus for buyers. Knowing the strategic ways of marketing and selling homes in a high inventory marketplace is how we create permanent and valuable relationships with the listing agents who are holding a surplus of listings that may have been on the market too long.
While we call it a Seller Buydown Mortgage, buyers, sellers, and agents tend to understand this loan option best when explained in terms of being a permanent rate reduction or seller credit to a buyer’s interest rate.
A simple way to look at the math is that a $1 rate buydown has a similar impact of a $3 price reduction. For example, a $15,000 rate buydown could equal a similar monthly mortgage payment as a $45,000 drop in the sales price assuming a 0.25 reduction in rate for every 1 point paid by the seller on borrower’s behalf. A Seller Buydown Mortgage can, on average, save a borrower up to three times more in monthly payment when compared to a simple price reduction.
A critical point often overlooked by agents is the fact that the buyer gains an immediate financial benefit since the seller is funding the permanent rate reduction and there is no out of pocket cost to the buyer. One of the most common misunderstandings by agents is that a buyer would have to spend 3-5 years with the property before their savings in payment equals the cost of a buydown rate.
However, in a scenario where a seller and buyer are negotiating a price drop, the better deal for the buyer is to apply the seller’s donated equity to a rate reduction versus a lower price. This strategy is a win-win for the buyers, sellers, as well as both representing agents, because the buyer can get the affordable payment they need to purchase the home they want and the seller is now able to net the cash they may need to make the transaction possible.