Rate Buydowns and Seller Credits: When a Concession Is Worth More Than a Price Cut

When a seller agrees to give something up, a buyer can take it in three forms: a lower price, a credit toward closing costs, or money spent buying down the interest rate. The seller's cost is identical in each case. The buyer's benefit is not, and which form is worth most depends on how long the buyer will keep the loan and how much cash they have on the day of closing.

The short version: for a buyer short of cash, a closing-cost credit usually helps most. For a buyer who expects to keep the mortgage for many years, a permanent buydown can be worth more per dollar than a price reduction. A temporary buydown helps only in the first year or two, and a buyer who will not refinance needs to be ready for the full payment after that.

Three ways to take the same concession

A price reduction lowers the loan, the down payment if it is a percentage, and the deed excise the seller pays.
A closing-cost credit leaves the price where it is and pays some of the buyer's costs at closing: lender fees, title insurance, prepaid taxes and insurance. What a buyer pays at closing lists them.
A rate buydown uses the money to reduce the interest rate, permanently or for the first years of the loan.

The appraisal applies to all three. A credit is not a way to pay a price the house does not support: if the price is $10,000 higher to fund a $10,000 credit and the appraisal does not reach it, the buyer has a gap. A low appraisal covers what happens next.

A permanent buydown: discount points

A discount point is a fee paid at closing, usually one per cent of the loan amount per point, in exchange for a lower rate for the life of the loan. How much rate a point buys varies by lender and by day, so the only reliable figure is the one on a Loan Estimate.

The test is the break-even period. An illustration: on a $600,000 loan, one point costs $6,000. Suppose the lender's pricing shows that point reducing the monthly payment by $100. The point pays for itself after 60 months — five years. Keep the loan longer and it keeps paying; refinance or sell in year three and you have spent $6,000 to save $3,600.

Put the numbers for two or three point options into the mortgage calculator and compare the payments side by side.

A temporary buydown: the 2-1 and the 1-0

A temporary buydown lowers the payment for the first years of the loan, funded by money set aside at closing. In a 2-1 buydown the effective rate is two percentage points lower in the first year and one lower in the second; from the third year the full rate applies. A 1-0 lowers only the first year.

Three things to understand before choosing one:

You qualify at the full rate. Lenders generally underwrite the loan at the note rate, not the reduced first-year rate, so a temporary buydown does not help you qualify for more.
The third-year payment is the real payment. Plan the household budget around it from the start.
Ask what happens to the unused subsidy if you refinance or sell before it runs out. Programmes differ; often it is applied to the balance.

A temporary buydown suits a buyer who expects their income to rise, or who reasonably expects rates to fall and plans to refinance — knowing that expectation may not come true. Buying when rates move covers that bet.

How much a seller is allowed to contribute

Lenders cap seller contributions, because large ones can disguise an inflated price. The caps depend on the loan:

Conventional loans follow the Fannie Mae and Freddie Mac limits on "interested party contributions". For a home you will live in, those have long been 3% of the price when the loan is above 90% of value, 6% between 75% and 90%, and 9% at 75% or less; on an investment property the limit is 2%.
FHA loans have their own cap, set by HUD.
VA loans limit seller concessions separately from the normal closing costs a seller may pay.

On any loan, a credit cannot exceed the buyer's actual closing costs and prepaid items. A contribution above the cap is treated as a reduction of the price, which changes the loan-to-value calculation. Check the current figures with your lender, since the agencies revise their guides; which mortgage fits covers the loan types themselves.

Price cut or credit: the arithmetic on one example

Take a $10,000 concession on an illustrative purchase with 20% down.

As a price cut, it lowers the down payment by $2,000 and the loan by $8,000. The monthly saving is small — a fraction of what $10,000 in points could buy.
As a closing-cost credit, it puts $10,000 back in the buyer's pocket at closing, which can be the difference between a comfortable emergency fund and none.
As points, it may lower the payment for as long as the loan lasts, which over a long hold usually beats the price cut by a wide margin.

The price cut has one advantage the others lack: it lowers what you owe from the first day, which matters if you sell early or values fall.

Which buyer should take which

Short of cash for closing: a credit.
Keeping the loan for many years: points, after checking the break-even.
Likely to move or refinance within a few years: a price reduction, or a temporary buydown if early cash flow is tight.
A seller, choosing what to offer: a credit or buydown keeps the recorded price higher, which some sellers prefer. A buyer deciding what to ask for should look past that preference to the arithmetic above.

Concessions are negotiated like everything else. Negotiating beyond price covers where they fit, and assumable mortgages covers the other way buyers chase a lower rate.

General information as of 2026, not lending advice. Point pricing, buydown programmes and contribution limits vary by lender and loan type and change; your Loan Estimate and your lender's current guidelines govern.