The first difference is Discount points are only paid by the Buyer, and Interest Rate Buy Down is only paid by the Seller. Let’s explore further.
Discount points and rate buydowns are similar to one another as they are both ways to get your interest rate down from the standard market rate based on the programs selected as a buyer. Discount points are typically used to buy down the current interest rate on a mortgage. As a general rule,1 point or 1% of the loan amount can typically drop the rate by .25%. This isn’t always the case but a general rule of thumb. For example, it could go from 7% to 6.75% by paying one discount point or 1% of the loan amount down at closing. Every transaction can be a little bit different.
Buydowns are paid by the seller, they are typically as follows, 3/2/1 buydown or a 2/1 buydown or even a 1/0 buydown. If selecting the 3/2/1 buydown, the seller would be charged at closing for this option. If today’s rate is 7%*, in the first year of the mortgage, the rate would be 3% or the rate for 1 year would be 4%, then adjusts to 5% the 2nd year, then in the 3rd year, another adjustment to 6%. Then the rate is back to 7% for the remainder of the loan. As rates drop, you can refinance at any given time to take advantage of the lower fixed rate if they were to drop well below 7%, the cap rate.
Both of these programs are similar as they both get you a lower interest rate. The seller buy downs are more aggressive compared to the regular buyer discount points paid to help lower the rate. The cost could be higher on a buyer discount point program compared to the seller buydown cost.
Seller buy downs are a creative concession for sellers to assist in selling their home quickly as sellers are assisting a buyer have a much lower interest rate for a period of time. Offering buy down dollars rather than closing costs is sometimes an interesting thought. This is especially true if the seller is a New Construction builder!
Ask Leslie to set up a meeting with me to discuss how Discount Points or Buy Down by the seller could work for you!
Kyle Crouch – VP of Mortgage Lending -Certainty Home Lending
*rates are based on an average going rate as of January 2024 and are always subject to change without notice and is different from buyer to buyer based on credit scores, file history, sales price and/or loan amounts and the terms of the loan.
