Should I Ask for a Lower Price or a Mortgage Rate Buydown?

When you're negotiating on a home, you may have more than one way to save money.

Should you ask the seller to lower the price? Or would you be better off asking the seller to contribute money toward a mortgage rate buydown?

The answer depends on your priorities, your loan, and how long you expect to own the home.

What Happens When You Lower the Purchase Price?

A lower purchase price sounds like the obvious choice, and sometimes it is.

It reduces the amount you're paying for the home and may slightly lower your monthly mortgage payment.

But here's what surprises many buyers: A price reduction doesn't always lower the monthly payment as much as you might expect.

For example, reducing the price of a home by $10,000 doesn't mean you're saving $10,000 immediately. If you're financing the purchase, that savings is spread over the life of the loan.

What Is a Mortgage Rate Buydown?

Instead of reducing the price, a seller may agree to provide a credit that can be used toward eligible closing costs, including certain mortgage rate buydowns.

A permanent rate buydown generally involves paying points upfront to obtain a lower interest rate.

There are also temporary buydowns, such as a 2-1 buydown, where the interest rate used to calculate the buyer's payment is temporarily reduced during the first years of the loan before returning to the full note rate.

Your lender can explain which options are available and what they would cost.

Which One Saves More Money Each Month?

This is where it gets interesting.

Depending on the numbers, using a seller contribution toward a rate buydown may reduce your monthly payment more than using that same negotiating power to reduce the purchase price.

That doesn't automatically make the buydown the better choice.

If you don't plan to keep the mortgage very long, for example, paying for a permanent rate reduction may not provide enough time to recover the upfront cost.

That's why I like to have the lender run the numbers both ways.

Option A: Lower purchase price.

Option B: Seller contribution toward closing costs or a rate buydown.

Then you can compare the cash needed at closing, monthly payment, and longer-term costs.

Don't Negotiate on Price Alone

When I'm helping a buyer write an offer, I don't look only at how far we can get the seller to come down on price.

Depending on the situation, there may be several things worth negotiating:

• Purchase price
• Seller-paid closing costs
• Mortgage rate buydown
• Repairs
• Home warranty
• Other terms that are important to the buyer

Sometimes the strongest financial benefit isn't the one with the biggest price reduction.

New Construction Buyers Should Compare the Numbers Too

This is especially important with new construction.

Builders may offer financing incentives or money toward closing costs when buyers use an affiliated or preferred lender.

Instead of looking only at the advertised interest rate or home price, compare the entire financing package.

A lower rate with one offer isn't necessarily better if another option has a lower price or lower overall costs.

The Bottom Line

If a seller is willing to negotiate, don't automatically assume that asking for the biggest price reduction is your best option.

Ask your lender to show you the numbers.

Then you can compare what each option does to your monthly payment, upfront cash, and longer-term costs and decide which one works best for you.

If you're buying a home in the Austin area, I can help you evaluate the property, negotiate the offer, and work with your lender to compare your options before you decide how to structure your offer. 

Elizabeth Helm, REALTOR®| 512-962-7814| elizabeth.helm@exprealty.com