buy down

I am interested in purchasing a home from a person who is anxious to sell. Is there any reason I should ask the seller to buy down the mortgage as opposed to simply lowering the price?

If interest rates are high or trending upward, it might make sense to try to get a lower rate by asking the seller to “buy down" the normal market rate you would get. To do this, the seller, at closing, would pay part of the sales price to your mortgage company in the form of discount points, which are prepaid interest. The advantage to you as the borrower is a lower fixed permanent interest rate, which of course lowers your monthly payment. If you plan to live in the home for a relatively long period of time, this can amount to substantial savings.

If rates are low or trending downward, you might be better off just having the seller reduce the sales price instead of buying down your mortgage. If you do not change the amount of your down payment, this would lower the amount of your mortgage, which of course would lower your monthly payment. If rates drop low enough, you can always refinance to get a better deal. If you plan to live in the home for a relatively short period of time (three years or less), the impact of having the seller buy down your interest rate is not as strong.

From the perspective of the seller, there isn't much difference between buying down the loan rate or just reducing the purchase price by the same amount—either way it means less money at closing.

Scott Alderman, Broker and President, First Commercial Real Estate, Valdosta, GA