30-year at 6.86%: would you take a $10K price cut or a $10K rate buydown?

Question

Rates finally slipped under 7% this morning, about 6.86% on the 30-year. First time in roughly seven weeks.

That means the question I get on almost every offer right now is going to get even louder: should I ask the seller to cut the price, or ask them to pay to buy my rate down?

Let's run it from the ground up, because I think a lot of buyers pick the wrong one.

The setup

$300,000 house. 20% down, so a $240,000 loan. The seller has agreed to give you $10,000 one way or the other.

Quick definitions first. A point is a fee you pay at closing equal to 1% of the loan. On this loan, one point is $2,400. A common rule of thumb is that one point lowers your rate about a quarter of a percent. Every lender prices this differently, so ask yours for the real number.

Option A: $10,000 off the price

• Loan drops to $232,000 at 6.86%.
• Principal and interest: about $1,522 a month.
• Savings vs. no concession: about $52 a month.

Loan drops to $232,000 at 6.86%.

Principal and interest: about $1,522 a month.

Savings vs. no concession: about $52 a month.

Option B: $10,000 toward a permanent rate buydown

• $10,000 buys a little over 4 points on a $240,000 loan. At the rule of thumb, that's roughly a full percent, from 6.86% down to about 5.86%.
• Principal and interest: about $1,417 a month.
• Savings vs. no concession: about $157 a month.

$10,000 buys a little over 4 points on a $240,000 loan. At the rule of thumb, that's roughly a full percent, from 6.86% down to about 5.86%.

Principal and interest: about $1,417 a month.

Savings vs. no concession: about $157 a month.

On payment alone, the buydown wins by about $105 a month, roughly three times the monthly savings of the price cut.

So why doesn't everybody take the buydown?

• If rates keep falling and you refinance in two or three years, you threw away most of what that buydown paid for. The price cut stays with you forever.
• A lower price means you start with more equity, and it can help keep your assessed value (what the county taxes you on) lower down the road.
• There are caps on how much a seller can contribute. On a conventional loan it's generally 3% with less than 10% down, 6% with 10% to 25% down, and 9% with more than 25% down. Investment properties are capped at 2%. FHA allows up to 6%.

If rates keep falling and you refinance in two or three years, you threw away most of what that buydown paid for. The price cut stays with you forever.

A lower price means you start with more equity, and it can help keep your assessed value (what the county taxes you on) lower down the road.

There are caps on how much a seller can contribute. On a conventional loan it's generally 3% with less than 10% down, 6% with 10% to 25% down, and 9% with more than 25% down. Investment properties are capped at 2%. FHA allows up to 6%.

There's also a middle option some builders are pushing right now, a temporary buydown (a 2-1 buydown: your rate is 2% lower the first year, 1% lower the second, then full rate). Lower payment while you settle in, but it ends.

My honest take: if you plan to hold the loan a long time and you think rates are stuck near here, the permanent buydown usually wins. If you think rates are headed toward 6% and you'll refinance, take the price.

What's everybody doing on their offers right now? Asking for price, rate, or closing costs? And how many points per quarter percent are your lenders actually quoting this week?

Adam Summerer · Answer

On a keep-forever primary or a long hold rental I'd usually take the price cut — it lowers the loan amount, the interest you pay over time, and what you need on a future refi or sale. If it's a temporary buydown (2-1 or 1-0), the payment steps up after 12–24 months, so it only wins if you'll sell or refi before then or the relief is what clears DTI/DSCR. If it's permanent points, divide the $10k by the monthly savings to get your break-even month and compare that to how long you'll realistically keep the loan. Run both to the same five-year cost, not just month one.

Josh Altman · Answer

Good

Josh Altman · Answer

Good

Adam Summerer · Answer

@Rob Bergeron Depends on the deal honestly. On long holds I usually lean mostly price cut since it lowers the basis and the loan amount for good, then only buy points if the seller credit is left over and we're pretty sure we're keeping the loan past breakeven. Splitting it makes sense when the price cut alone doesnt get the DSCR where it needs to be.

Rob Bergeron · Answer

Adam, that matches how I think about it on long holds. A price cut stays with you for the life of the loan and keeps working if you refinance, while points only pay off if you keep that loan past breakeven.

The DSCR angle is a good one. On a lot of the smaller rentals here in Louisville the rent is set by the market, so the only levers left are the price and the payment. If the price cut alone can't get the ratio where it needs to be, putting the leftover credit toward the rate can be the difference between a deal that qualifies and one that doesn't.

One more thing in favor of the price cut: a lower contract price gives you a little more cushion if the appraisal comes in tight. When you do split it, how do you usually set the breakeven you're comfortable with on the points?

Rob Bergeron · Answer

Adam, the temporary versus permanent split is the part that gets glossed over the most. A lot of the seller-paid buydowns I see written into contracts are 2-1s, and buyers hear "lower rate" without realizing the payment goes up in year two and again in year three. If the full payment doesn't work on day one, the temporary buydown just delays the problem.

Running both options out to the same five-year cost is a good way to cut through it. Month one makes the buydown look great, but it's the total over the time you actually hold the loan that matters.

On long-hold rentals, do you ever split the difference, taking part of it as a price cut and part as points, or do you usually go all one way?

Jimmy Samaha · Answer

Using your numbers, the buydown puts about $105 a month more in the buyer's pocket than the price cut, so it takes roughly 95 months, call it 8 years, for that extra savings to add up to the $10k. If the buyer is honestly likely to refinance or sell before then, the price cut is usually the safer pick. From the seller's side the net is the same $10k either way, but the price cut is what shows up as the sale price on the record, so some sellers in neighborhoods with thin comps prefer giving the credit. Appraisers will often adjust for big concessions anyway, so I wouldn't lean on that too much.

Rob Bergeron · Answer

Jimmy, that's the piece that settles it for most buyers: how long will they actually keep this loan? If rates keep drifting down and they refinance in two or three years, the money spent on the buydown is gone and the price cut would have stayed with them in the loan balance.

Good point on the recorded sale price too. In Louisville we have plenty of pockets where there are only a handful of recent sales, and one lower number can show up in the next appraisal down the street. Some sellers care about that more than you'd expect. Like you said, though, appraisers tend to look at concessions anyway, so it shouldn't be the main reason to pick one.

When you're on the buyer side, do you have them pick a realistic hold period before you run the numbers, or do you show them a few scenarios side by side?

Chris Seveney · Answer

In today's environment, I would take the buydown.

I was also just at a conference, and several large originators all mentioned that the biggest thing sellers are looking at right now is the monthly payment. If they can reduce their monthly payment via a buydown, that is what is preferred right now over taking other types of seller credits.

Josh Altman · Answer

I have an apartment for sale and any one interested?

30-year at 6.86%: would you take a $10K price cut or a $10K rate buydown?

The setup

Option A: $10,000 off the price

Option B: $10,000 toward a permanent rate buydown

So why doesn't everybody take the buydown?

15 Replies