Price Reduction vs Rate Buydown: Which Does More for the Same Money?

Put the same money toward a buyer's rate instead of your price, and their payment drops far more in the first two years. At this week's rates, a rate buydown takes about ten times as much off the year-one payment as a price reduction does. The price reduction keeps helping, a little, for the life of the loan.

If your home has been on the market a few weeks, or you're getting ready to list and watching rates climb, a lower price can feel like the only move you have. It's one of two, and on a $700,000 home the difference between them is easy to see.

Why Mortgage Rates Matter to Your Sale Right Now

Freddie Mac's weekly survey had the average 30-year rate at 7.32% on October 22, a little lower than the week before.

A year earlier, it was 6.19%. On a $560,000 loan, that difference adds about $421 to a buyer's monthly payment.

In the National Association of Realtors' report on September sales, chief economist Lawrence Yun said, "Further increases in mortgage rates in recent weeks mean fewer buyers can qualify to purchase a home."

Sellers are still giving a little to get to a sale, too. In September, detached homes in San Diego County closed at 97.7% of their original list price, according to North San Diego County Realtors. On a $700,000 list price, that gap would be about $16,000.

So some money is often on the table already. You get to decide how it reaches the buyer.

Price Reduction vs Rate Buydown on a $700,000 Home

Say you're selling for $700,000 to a buyer putting 20% down, and you're willing to give about $13,200. That's about what it costs to buy their rate down for two years at Freddie Mac's average this week, so it makes a fair test.

A 2-1 buydown lowers the buyer's rate by two percentage points the first year and one the second, then the full rate starts. Your money goes into an account that covers the difference each month.

When the buydown ends in year three, the buyer pays the full amount. The price reduction keeps saving them about $73 a month the whole time, and it trims their down payment by $2,640.

If you want this math on your own price and payoff, I'll run it with you.

What You'd Walk Away With Either Way

For you, the two land close. Either way, the money comes out of what you'd get at closing. A price cut also trims the costs figured on the price, like the county transfer tax and most commissions, so it can leave you slightly ahead of an equal credit.

A credit comes with rules a price cut doesn't. It has to go toward the buyer's closing costs or their rate, and Fannie Mae doesn't allow it to cover their down payment. Your price also stays where it is, so the appraisal has to support it.

Every loan type caps what you can put in, and a buydown counts toward the cap. On a conventional loan, Fannie Mae allows 3% to 9% of the price or appraised value, whichever is lower, depending on the down payment. On a VA loan, concessions like a buydown are capped at 4% of the appraised value, on top of the buyer's normal closing costs.

This example fits under each of those, and the buyer's lender confirms the exact limit.

On my listings, when an offer asks for a lower price, I put a credit toward the buyer's rate next to it, with what you'd walk away with on each, so you can counter with the one that works for you. Buyers weigh the same choice from their side, which I wrote about in what a seller's $10,000 is really worth to a buyer.

When a Price Reduction Fits and When a Rate Buydown Fits

A price reduction tends to do more when the price is what's keeping people away. If few buyers are touring or saving your home, they're reacting to the number, and a credit they'd only hear about later can't help with that. A lower price also reaches buyers who set a top price in their search just under where you were.

A rate buydown tends to do more when buyers like the home and stall on the payment. With rates above 7%, the monthly number is what a lot of buyers are watching, and a credit you name in the listing lets them and their lenders plan around it before they write an offer.

A buydown has limits, too. On a conventional loan, Fannie Mae has the lender qualify the buyer at the full rate, so a buydown makes the first two years easier without raising what they can borrow. When it ends, the payment goes to the full amount, so the buyer needs to be ready for it from day one. Counting on a refinance before then isn't a plan.

There's also a permanent buydown, where the same money lowers the rate for the life of the loan. It usually takes less off the rate than a 2-1 does in year one, and the buyer's lender prices it the day they lock.

If you're already listed, the first month on the market says a lot about whether the price is the problem, which I covered in what your listing's first four weeks tell you. For the rest of how I work with sellers, start with how I help you sell your home, or browse more posts on selling your home.

Questions I Get About Rate Buydowns and Price Cuts