Interest Rate Buy-Downs 101

The increase in rates has buyers looking for creative ways to lower their monthly payments, and the biggest bang for their buck is with a seller-paid buy down.

What it is: The seller agrees to pay for the buy down, which lowers the buyer's interest rate for a set period of time.

Example: 800k purchase price with 20% down. The seller would pay $14,480 for a 2-1 buydown. In this scenario, the note rate would be 6.375%, but for the first year, the lender would allow the buyer to pay at 2% below the note rate. For the second year, the buyer would pay 1% below the note rate. Year three and on would be at the 6.375% note rate.

Year One: 4.375% rate. Principal & Interest payment is $3,195/mo. This saves the buyer $797 per month!

Year Two: 5.375% rate. Principal & Interest payment is $3,583/mo. This saves the buyer $409 per month!

Year Three+: 6.375% rate. Principal & Interest payment is $3992/mo.

To compare: That same $14,480 credit from the seller would get the buyer approx. .625% better than the rate, saving them $258/mo.

The takeaway: The buy-down is a good strategy at the seller's expense when a refinance opportunity is anticipated in the near future.

Fine print: Buy downs are only available on conventional loan sizes (647,200 or under in Nevada County and $675,050 and under in Placer County).

For buyers looking to get pre-approved over the weekend, please feel free to complete a loan application by clicking here.