The seller of a $750,000 home in Camarillo has agreed to give up $15,000 to make the deal work. Your agent asks how you want it: off the price, or as a credit. If it is a credit, your lender asks the next question: a temporary buydown, discount points, or closing costs? The choices are not close to equal, and the buydown vs discount points decision alone can swing the result by thousands of dollars.
The four options cost the seller nearly the same amount. For you, one lowers the payment by $91 a month, one by $243, one by $752 in the first year, and one by nothing at all. One leaves $15,000 in your bank account. Which is best depends on how long you will keep the loan and whether you are short on cash or short on monthly budget.
Bill Lewis at Choice One Mortgage has spent more than 30 years helping Southern California buyers structure offers. In this guide, we'll run the same $15,000 through all four options, show what each is worth after 3, 5 and 10 years, and match each one to the buyer it fits.
Quick answer: If you expect to sell or refinance within about five years, take the money as a 2-1 temporary buydown or a closing-cost credit, or take the price reduction if cash and payment are both comfortable. Discount points win only if you keep the loan longer than about five years; in our example they pass the other options at month 64 and are worth $37,411 by year 10. A price cut is worth the most on paper early on but lowers the payment only $91 a month. If you need a lower payment to qualify, points are the only option that moves the qualifying payment much.
The Example: One $15,000 Concession, Four Ways to Take It
Every number below comes from one deal, so the four options can be compared fairly.
| Deal Detail | Amount |
|---|---|
| Purchase price | $750,000 |
| Down payment (20%) | $150,000 |
| Loan amount | $600,000, 30-year fixed, conventional loan |
| Example rate with no points | 6.5% |
| Principal & interest at 6.5% | $3,792.41/month |
| Closing costs and prepaids (estimate) | $15,000 |
| Cash to close with no concession | $165,000 |
| Example cost of points | 1 point (1% of the loan, $6,000) lowers the rate 0.25% |
The rates, points pricing and figures in this article are examples only. Rates and the cost of points change daily and depend on each borrower's credit, down payment and loan. Property tax is estimated at 1.25% of the price. Mortgage insurance does not apply at 20% down.
How Each Option Works
1. A Price Reduction
The price drops to $735,000. With 20% down, your down payment falls by $3,000 and your loan by $12,000, to $588,000. The payment drops $75.85 a month, and property tax drops about $15.63 a month because you are taxed on the lower price. That is $91 a month in total.
2. A Permanent Buydown With Discount Points
The seller's $15,000 pays 2.5 points on your $600,000 loan. At the example price of 0.25% per point, the rate drops from 6.5% to 5.875% for the life of the loan. The payment falls to $3,549.23, which is $243.18 a month less.
3. A 2-1 Temporary Buydown
The note rate stays at 6.5%, but you pay as if the rate were 4.5% in year one and 5.5% in year two. The seller's money goes into an account at closing and makes up the difference each month. On this loan the 2-1 buydown costs $13,655.64, so $1,344 is left over to reduce your closing costs.
| Year | Rate You Pay | Monthly P&I | Monthly Savings | Savings for the Year |
|---|---|---|---|---|
| 1 | 4.5% | $3,040.11 | $752.30 | $9,027.56 |
| 2 | 5.5% | $3,406.73 | $385.67 | $4,628.09 |
| 3 to 30 | 6.5% | $3,792.41 | $0 | $0 |
| Cost of the buydown | $13,655.64 |
Under Fannie Mae's temporary buydown rules, you must qualify at the full 6.5% note rate, the rate you pay cannot rise more than 1% a year, and the option is limited to primary residences and second homes. Our buydown calculator prices a 2-1, 3-2-1 or 1-0 buydown on your own loan amount.
4. A Closing-Cost Credit
The seller pays your $15,000 of closing costs and prepaids. Your loan, rate and payment stay exactly where they were. You bring $150,000 to closing instead of $165,000 and keep the difference in the bank.
Side by Side: Payment, Cash to Close, and Value Over Time
The bottom rows answer the real question: how far ahead are you compared with getting no concession at all? Each figure adds up the cash you kept at closing, the payments and property tax you saved, and how much less you owe on the loan on that date.
| Price Reduction | Discount Points | 2-1 Buydown | Closing-Cost Credit | |
|---|---|---|---|---|
| Loan amount | $588,000 | $600,000 | $600,000 | $600,000 |
| Note rate | 6.5% | 5.875% | 6.5% | 6.5% |
| P&I in year 1 | $3,716.56 | $3,549.23 | $3,040.11 | $3,792.41 |
| P&I in year 2 | $3,716.56 | $3,549.23 | $3,406.73 | $3,792.41 |
| P&I in years 3 to 30 | $3,716.56 | $3,549.23 | $3,792.41 | $3,792.41 |
| Cash to close | $162,000 | $165,000 | $163,656 | $150,000 |
| Payment used to qualify you | $3,716.56 | $3,549.23 | $3,792.41 | $3,792.41 |
| Ahead after 3 years | $17,863 | $11,276 | $15,000 | $15,000 |
| Ahead after 5 years | $19,722 | $18,800 | $15,000 | $15,000 |
| Ahead after 10 years | $24,150 | $37,411 | $15,000 | $15,000 |
| When you have the full $15,000 of value | At closing | Month 48 | Month 24 | At closing |
Three things stand out:
- The price reduction is worth the most on paper for the first five years, and you feel it the least. Of the $17,863 at year three, $11,570 is a lower loan balance that you only collect when you sell or refinance. The monthly relief is $91.
- Discount points start behind and finish far ahead. They are worth $11,276 at year three, pass the $15,000 mark at month 48, pass the price reduction at month 64, and reach $37,411 at year 10. Counting payment savings alone, the break-even is $15,000 divided by $243.18, or 62 months.
- The 2-1 buydown and the credit are worth $15,000, no more and no less. They deliver it early, when most buyers are stretched by moving costs, furniture and a new payment.
Which Option Wins for Which Buyer
| Your Situation | Best Fit | Why |
|---|---|---|
| You will keep this loan 7 years or longer | Discount points | From month 64 on, points are ahead, and the gap widens every month. |
| You expect to refinance within 2 to 4 years | 2-1 buydown | You get $13,656 of payment relief before the refinance, and you start from a rate that is easy to improve on. |
| You are short on cash after the down payment | Closing-cost credit | It cuts cash to close by $15,000. The price reduction cuts it by only $3,000. |
| Your debt-to-income ratio is too high | Discount points | It is the only option that lowers the qualifying payment by a meaningful amount: $243 a month. |
| Cash and payment are both comfortable, and you may sell within 5 years | Price reduction | You owe $12,000 less from day one and pay less property tax every year you own the home. |
| The home may not appraise at the contract price | Price reduction | A lower price closes the appraisal gap. A credit does not. |
The Refinance Question
Points are a bet that you keep the loan. Suppose rates fall and you refinance at the end of year three. The 2.5 points returned $11,276 of their $15,000 cost, so $3,724 is gone, and your 5.875% rate makes the refinance harder to justify than it would be from 6.5%. The temporary buydown has already paid out in full by then.
If you refinance or sell before a temporary buydown is used up, Fannie Mae's rules provide that the unused funds are credited toward the payoff or returned, as the buydown agreement states. At month 18 of our example, $2,314 would still be in the account.
The Qualifying Question
Lenders qualify you at the note rate. A 2-1 buydown lowers what you pay, not what you qualify on, and a closing-cost credit changes neither. If your loan approval is tight on debt-to-income, $15,000 of points lowers your qualifying payment by $243, which at a 45% ratio is the same as having about $540 more in monthly income. The price reduction lowers it by $91. Our discount points calculator shows the break-even for any number of points.
You Can Split the Money
Nothing requires you to pick one. Two ways to divide $15,000:
- One point plus closing costs. $6,000 buys the rate down to 6.25% and saves $98.10 a month for as long as you keep the loan. The other $9,000 comes off your cash to close.
- A 2-1 buydown plus closing costs. This is option three above.
You can also split between price and credit. The seller's side of that decision is covered in the seller credit vs. price reduction math for sellers. The short version: the seller nets almost the same either way, so the choice is usually yours to make.
The Limits on Seller-Paid Credits
A price reduction has no cap. Credits do. Lenders call them interested party contributions, and Fannie Mae limits them to a percentage of the price or the appraised value, whichever is lower. Points and temporary buydowns paid by the seller count toward the limit.
On a primary residence the cap is 3% with less than 10% down ($22,500 on a $750,000 home), 6% with 10% up to 25% down ($45,000, which covers our example) and 9% with 25% or more down.
A credit cannot be used for your down payment or reserves and cannot come back to you as cash. If your closing costs total $11,000 and the credit is $15,000 with no buydown attached, the extra $4,000 is lost unless we put it to work on the rate. FHA loans and VA loans have their own caps, and jumbo loans follow each lender's rules, which are often tighter. Our seller concession strategy guide lists the limits for every loan type.
How to Decide: Step by Step
- Estimate how long you will keep the loan, not the house. If you believe rates will be lower in three years, your loan has a three-year life.
- Find your tight spot. Is it cash to close, the monthly payment in the first two years, or the debt-to-income ratio on your approval?
- Ask us for the four-way comparison on your actual price, down payment and rate.
- Check the points pricing that day. If a point buys 0.25% the break-even is about five years. If it buys 0.125%, it is about ten.
- Confirm the credit fits under the limit for your loan type and your real costs.
- Have your agent write the offer to match: a price, a credit amount, and what the credit is for.
- Recheck after the appraisal. A low value can change which option is best.
The seller credit vs. price reduction calculator compares a credit with a price cut on your own numbers before you call.
Mistakes That Cost Buyers Money
- Choosing by the first-year payment. With a 2-1 buydown, budget for $3,792, not $3,040.
- Buying points and refinancing two years later. At month 24 the points in our example have returned $7,513 of $15,000.
- Assuming every point buys the same rate drop. Pricing is not a straight line. The third point often buys half as much as the first. Ask for the rate at each half point.
- Ignoring the appraisal. A credit keeps the price at $750,000, so the home has to appraise there. If it comes in at $735,000, you are back to negotiating.
- Deciding after the offer is signed. Changing a price reduction into a credit mid-escrow takes an addendum and the seller's agreement. The contingency timeline in the purchase agreement leaves little room for it.
The Bottom Line
The same $15,000 is worth $11,276 or $37,411 depending on where you put it and how long you keep the loan. Short horizon or tight cash: take the temporary buydown or the closing-cost credit. Long horizon or a tight debt-to-income ratio: buy the rate down with points. Comfortable on both and unsure about the future: take the lower price and owe less.
We run this comparison before the offer goes in, so your agent can ask for the right thing the first time. See how we structure purchase loans, or send us the price and your down payment and we'll send back the four columns.
Have a seller concession on the table?
Call Bill Lewis at (310) 614-5920 and we'll price all four options on your loan before you answer the seller.
Get a Free ConsultationFrequently Asked Questions About Buydowns, Points and Price Reductions
Is it better to buy down the rate or take a lower price?
It depends on how long you keep the loan. In our $750,000 example, a $15,000 price reduction is ahead for the first five years and discount points are ahead from month 64 on. By year 10 the points are worth $37,411 against $24,150 for the price cut.
What is the break-even on discount points?
Divide the cost of the points by the monthly payment savings. In our example, $15,000 divided by $243.18 is 62 months. If you count the faster paydown of the loan at the lower rate, the points have returned their full cost by month 48.
Does a 2-1 buydown help me qualify for a bigger loan?
No. Fannie Mae requires the lender to qualify you at the note rate, not the reduced rate you pay in the first two years. A 2-1 buydown is a cash-flow tool for the early years. Only a permanent buydown with points lowers the payment used to qualify you.
What happens to a temporary buydown if I refinance early?
The unused money does not simply vanish. Under Fannie Mae's rules the remaining funds are credited toward the payoff or returned to the borrower or lender, depending on what the buydown agreement says. Ask to see that language before closing, because it decides who gets the balance.
How much does one discount point lower the rate?
There is no fixed amount. One point costs 1% of the loan, and what it buys changes daily with the market and with your loan type. We used 0.25% per point in this article as an example. On some days a point buys more than that, and on others the second or third point buys only 0.125%.
Does a price reduction lower my property taxes?
Yes. In California your starting assessed value is the purchase price, so a $15,000 lower price saves about $187.50 a year at a 1.25% tax rate. A seller credit leaves the recorded price, and the tax bill, where it was.
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About the Author: Bill Lewis
Mortgage Loan Originator, Choice One Mortgage · NMLS #284797
Bill Lewis has spent more than 30 years helping Southern California homebuyers and the Realtors who serve them structure financing that fits their real situation. Based in La Quinta, Choice One Mortgage serves buyers throughout the Coachella Valley, Ventura County, and the South Bay. Learn more about our team or call (310) 614-5920.
This article is general information, not a loan offer or financial advice. The interest rates, discount point pricing, payments, closing costs and savings shown are examples only; actual rates and the cost of points change daily and depend on your credit, down payment, loan type and property. Seller contribution limits and temporary buydown rules are set by Fannie Mae, Freddie Mac, FHA, VA and individual lenders and can change. Property tax is estimated at 1.25% of the purchase price. This is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines, and property valuation. Equal Housing Opportunity. COMC, Inc. dba Choice One Mortgage Company. Licensed by the CA DRE #01238593. NMLS #233784.