Usually the rate. The same money spent buying down the buyer's mortgage rate lowers his monthly payment three to four times as much as the same money taken off the price. With rates at 7.32%, a $25k buydown on a $500k home cuts the payment $410 to $530 a month. A $25k price cut saves about $140.
Take a $500k home with 20% down, so a $400k loan.
At last year's rate of 6.19%, the mortgage payment on that loan was about $2,450 a month. At 7.32%, where rates sit now, it's about $2,750. Same home, same price, about $300 more every month. That's roughly 12%. All of it came from the rate.
Most of the climb was recent. Freddie Mac's survey had the 30-year at 6.66% at the end of August and 7.40% by mid-October. It eased to 7.32% this week.
A price cut lowers the payment in step with the cut. With the same 20% down, 5% off the price takes 5% off the payment, at any rate. On this home, $25k off the price saves the buyer about $140 a month.
Price cuts are the most common answer right now. In October, 43% of builders cut prices, the most in NAHB's builder survey since at least 2020. The average cut has held at 6% for seven months. On this home a 6% cut saves about $170 a month, against the $300 the rate added. It covers about half.
A buydown spends the money on the buyer's rate instead. The seller pays points to the buyer's lender. The lender lowers his rate for the life of the loan.
Spend the same $25k that way and his payment drops about $410 to $530 a month, depending on how his lender prices the points. That's three to four times what the price cut did, for the same money out of your pocket. After the cut his payment is about $2,610. After the buydown it's $2,220 to $2,340, so the price-cut payment runs $270 to $390 a month higher.
A price cut only shrinks the loan by part of the cut. With 20% down, $25k off the price takes $20k off the loan, and the buyer saves the interest on that $20k.
A buydown lowers the rate on the whole $400k, every month, for as long as he keeps the loan. The rate is what moved this year, so the rate is where the money does the most.
The largest builders make this call every quarter and report it.
All three numbers come from before rates hit 7.40% in October. In September, a Lennar executive told investors that as rates rise, more of the pressure could show up in what it costs to buy the rate down. None of this is a standard a smaller builder has to meet. It shows where the biggest sellers in the market put their money when rates climb: on the rate.
There's a cap on what a seller can put toward a buyer's costs. A buydown counts against it. On a conventional loan for a buyer who'll live in the home, the cap depends on his down payment: 3% of the price with less than 10% down, 6% with 10% to under 25% down and 9% with 25% or more down.
| Down payment | Cap | On a $500k home |
|---|---|---|
| <10% | 3% | $15k |
| 10% to <25% | 6% | $30k |
| ≥25% | 9% | $45k |
Source: Fannie Mae Selling Guide B3-4.1-02, conventional loan
On this home with 20% down, the cap is $30k, so the $25k buydown fits. The buyer's lender sizes the buydown to fit inside it.
A buydown works on a mortgage, so it does nothing for a buyer paying cash. If the buyer is buying the home to rent out, the cap is 2% of the price whatever he puts down, $10k on this home. And a buyer who expects to sell or refinance within a few years gets the lower payment only until then.
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