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How a Rate Buy-Down Can Benefit California Buyers AND Sellers

In this article: How California home buyers can use seller credits to “buy down” their mortgage rates, resulting in a smaller monthly payment.

With today’s higher home prices and mortgage rates, home buyers in California often look for ways to reduce their monthly payments. And the mortgage rate “buydown” is one of those strategies.

This is when the seller offers a concession to reduce the buyer’s mortgage interest rate, either for the duration of the loan or just for the first few years.

This strategy can result in a smaller monthly payment for the buyer. It can also be cheaper for the seller, when compared to making a major price reduction. Additionally, it can help sellers attract more offers from buyers, which is vital in a slower market. So it’s a “win-win.”

Here’s what you need to know about using a rate buydown when buying a home in California.

How a Mortgage Rate Buydown Works

When you apply for a mortgage loan in California, you will probably have the option to use what are known as “discount points.” This is when you pay extra money at closing in exchange for a lower mortgage rate.

The strategy can help you reduce your interest rate, as well as the total amount of interest paid over time. It also reduces the size of your monthly mortgage payments, making them more affordable.

This is also referred to as a mortgage rate “buydown” (or “buy down”), since you are essentially buying a lower mortgage rate by paying discount points.

You might be familiar with this strategy already. But what a lot of home buyers in California don’t know is that the seller can also pay for a mortgage rate buydown — on the buyer’s behalf.

This is commonly referred to as a seller concession or seller credit. The process basically works the same way, regardless of who is paying the discount points. But in both scenarios, it is the home buyer who benefits most, by receiving a lower mortgage rate.

How Sellers Benefit from Such a Concession

At first glance, you might think that only the buyer can benefit from this scenario. After all, the homeowner / seller is paying money out of their proceeds, in order to help secure a lower mortgage rate the buyer. So, what’s in it for the seller? What is their motivation for making such a concession?

The seller could actually benefit in two ways:

  • First of all, offering a seller credit for a mortgage rate buydown can help a homeowner attract more offers from buyers. This in turn can result in faster sale, which is usually one of the primary objectives for home sellers.
  • Additionally, a seller-paid mortgage rate buydown is usually a more attractive alternative, when compared to lowering the sale price. In a slower, less competitive real estate market, sellers have to go above and beyond to attract offers. And the rate buydown concession or credit is one way to do that.

As you can see, both parties stand to gain something when a seller credit is used to buy down the mortgage rate. The buyer ends up with a smaller monthly payment, which is a pretty big deal. And the seller could enjoy a faster sale and possibly more proceeds, by avoiding a major price cut.

How Does a Home Buyer Request It?

When the real estate market slows down, it’s common for sellers to offer enticements to attract buyers. Some sellers might even advertise the fact that they are offering a credit for a mortgage rate buydown.

They do this to get the attention of budget-minded home buyers (especially those who might encounter affordability challenges when trying to buy a home in California).

But what if the seller doesn’t come right out and offer a rate buydown?

In that case, the buyer can request it by writing it into the purchase offer. Like many aspects of a residential real estate transaction, the seller-paid mortgage rate buydown is negotiable. This means both parties can go back and forth to decide how they want to handle it, and to find common ground.

Much of this will depend on the current state of your local real estate market. In a hot market where homes are selling quickly, sellers are usually less willing to offer concessions. But in a slower market, where homes take longer to sell, home buyers have more leverage when requesting a seller-paid rate buydown.

The Bottom Line

Negotiations over the sale price and seller concessions are part of every real estate transaction. But what buyers and sellers sometimes don’t realize is that a seller-paid rate buydown strategy can benefit all parties involved — both short term and over the long run.

  1. Offering a below-market interest rate for the property will entice more buyers, resulting in a faster sale for the homeowner.
  2. It could save the seller money upfront, by avoiding a price reduction.
  3. It saves the buyer money in the long run, via lower payments and interest rate.
  4. It helps support home values in the area, by avoiding price cuts.

Granted, the seller credit mortgage rate buydown is not right for every California real estate transaction. It largely depends on market conditions. But in many cases, it’s exactly what is needed to get the deal done!

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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