Seller Buydowns

Discounted rates are often offered by lenders for adjustable rate mortgages (ARMs). These rates are even lower than the standard ARMs initial rates, which are in turn lower than fixed rates. These rates are often combined with a high number of points (equal to one percent of the total loan amount) paid upfront and can carry much higher interest rates after the initial period expires.

However, there are other very large discounts that are arranged by the seller. These are called often called “seller buydowns”. The seller agrees to pay an amount to the lender in exchange for the lender offering you a lower interest rate and lower payments at the beginning of your mortgage. The seller then increases the total price of the home in order to cover the cost of the buydown.

This type of buydown sharply decreases the amount you will have to pay early in your mortgage and has the potential to help you get approved for a larger loan than you might otherwise be approved for. However, it also leads to much higher costs in the future, both from a larger increase in the interest rate you will be paying and a larger principle to pay down. You should seriously consider whether you can afford these high future costs before agreeing to such an arrangement.

Because you will often end up making up the discount in future years, discounted rates often won’t really save you any money. If the discount amount is added to the price of your home, as it often is with seller buydowns, you definitely will not save money in the long term and may lose money from the deal. The added interest may increase the amount you have to pay so much you will suffer from what is sometimes called “payment shock”.