What is a rate buydown and how does it help my buyer?
Rob Miller explains how seller-funded and lender-funded rate buydowns work in Wisconsin and when they make sense as a negotiating tool for Realtors.
Rob Miller, Branch Manager at MadCity Home Loans, explains one of the most powerful negotiating tools available to Wisconsin Realtors right now.
What is a rate buydown and how does it help my buyer?
A rate buydown is a strategy where a lump sum of money — paid either by the seller or the builder — is used to temporarily or permanently reduce the buyer's interest rate. In today's rate environment, this has become one of the most effective seller concession strategies in Wisconsin.
Types of Buydowns
- 2-1 Buydown: The buyer's rate is reduced by 2% in year one and 1% in year two, then returns to the locked market rate in year three. The cost to fund this sits in an escrow account and subsidizes the difference each month.
- 1-0 Buydown: Rate is 1% lower for year one only, then adjusts to the permanent rate. Less expensive than a 2-1.
- Permanent Buydown (Points): Each "discount point" costs 1% of the loan amount and permanently reduces the rate, typically by 0.25%. Better for long-term buyers who plan to hold the loan 7+ years.
Why This Is a Powerful Negotiating Tool Right Now
Instead of a seller dropping their price by $10,000, they can contribute $10,000 toward a 2-1 buydown. The buyer gets dramatically lower payments for two years — enough time to refinance if rates drop — and the seller gets a higher sale price on paper.
I run these calculations instantly for any agent partner. Call me before you write the offer and I'll tell you exactly how much a buydown costs and what it saves your buyer each month.
Related Post: See a detailed breakdown of how this math works in our Mortgage Rate Buydown Strategy post.