A Guide to Understanding Interest Rate Buydowns  

A Guide to Understanding Interest Rate Buydowns  

  • Liz Kroft
  • 12/24/23

Even though we have seen two months of interest rate declines, many would-be homebuyers are still priced out of the real estate market. But some sellers and lenders are now offering a creative solution called a “temporary interest rate buydown program” to boost affordability. This post explains exactly how these specialized programs work and their unique benefits for both buyers and sellers.

What is an Interest Rate Buydown and How Does It Work? 

With a temporary buydown, a buyer's monthly mortgage payments are initially reduced below current market rates for the first 1-3 years of the loan. This discount is made possible by the seller, who deposits funds with the lender to essentially “buy down” the rate.  

Although the buyer must still qualify using the actual market rate, this arrangement eases budget shock from lofty payments during the buydown period. The buyer pays the lender as if the rate were lowered, with the seller contribution covering the difference. After the buydown period, the buyer's rate and payment adjust upwards to the prevailing market rate when the loan originated.

How Can This Benefit Struggling Homebuyers?

The key advantage for buyers is this temporary payment relief makes financing a stretch home more feasible despite tough rate conditions. Buyers may hope either to refinance at a lower future rate before payments increase, or leverage rising income over time to manage higher payments down the road.

What Motivates Sellers to Cover Buydowns? 

Offering a temporary buydown serves as a powerful incentive driving buyer competition for their listing. Like other closing credits, it allows sellers to effectively discount their home's price to broaden appeal and sell faster while still hitting their net target number.

Key Considerations Before Agreeing to a Buydown

If exploring a temporary interest rate buydown, buyers should involve their lender early and confirm the maximum credits allowed. Buyers also need to carefully assess their long-term ability to handle eventual payment jumps. Meanwhile, sellers should weigh costs against upside achieved. 

I'm Here to Help!

It is also imperative you work with a realtor who has experience with buydowns and knows how to negotiate them with the other party. As your local real estate advisor, I'm ready to guide you through the possibilities and limitations around temporary buydown programs in our market. Let's connect to explore win-win solutions tailored to your needs and goals!

Contact me today to learn more: 831.854.7489 (mobile) [email protected]

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With over nine years of full-time experience and more than $114 million in sales across the greater Bay Area, I work tirelessly to be a well-regarded agent, industry innovator, and ambassador for my clients.

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