How to Calculate a Seller-Paid Rate Buy-Down (With Real Numbers)

What a Seller-Paid Rate Buy-Down Actually Is

A seller-paid rate buy-down is a closing cost credit the seller pays directly to the buyer's lender to permanently reduce the loan's interest rate. The seller does not lower the purchase price. Instead, the seller prepays a portion of the interest on the buyer's behalf at closing. The result is a lower rate for the life of the loan, not just for an introductory period (that is a temporary buy-down, covered separately below).

Sellers offer concessions to close deals. A rate buy-down converts that concession from a one-time cash benefit into a compounding monthly savings.

The Core Formula for Calculating Buy-Down Cost

The cost of buying down a rate equals the number of points multiplied by the loan amount. One point equals 1% of the loan amount.

Point cost = Loan amount x (Points / 100)

The rate reduction per point is not standardized. Lenders set their own pricing. A common market quote is 0.25 percentage points of rate reduction per point paid, but lenders may quote 0.125 to 0.375 depending on the loan product, term, and current rate environment. Always pull this figure from the lender's Loan Estimate, not from a rule of thumb.

Breakeven Analysis: The Only Number That Matters

The breakeven period tells you whether the buy-down pays off before you sell or refinance. Calculate it this way:

Breakeven months = Total point cost / Monthly payment savings

If the breakeven arrives before your expected exit date, the buy-down produces a net gain. If it arrives after, you paid the seller's concession in a way that never benefits you.

Worked Example 1: A $450,000 Purchase with Two Points

A buyer contracts to purchase a home for $450,000. The buyer puts 20% down, producing a loan amount of $360,000 on a 30-year fixed mortgage. The lender quotes a market rate of 7.25%. The seller agrees to pay $7,200 in concessions toward a rate buy-down.

Step 1. Calculate points purchased.

$7,200 / $360,000 = 0.02, which equals 2 points.

Step 2. Determine the reduced rate.

The lender quotes 0.25 percentage points of reduction per point. Two points reduces the rate by 0.50 percentage points.

7.25% - 0.50% = 6.75%

Step 3. Calculate the monthly payment difference.

Monthly payment at 7.25% on $360,000: $2,457.

Monthly payment at 6.75% on $360,000: $2,335.

Monthly savings: $122 per month.

Step 4. Calculate breakeven.

$7,200 / $122 = 59 months (4 years, 11 months).

If the buyer stays in the home beyond 59 months, the buy-down generates net savings. Over 30 years, total savings equal $122 x 360 months minus the $7,200 upfront cost, or $36,720 net.

Worked Example 2: A $650,000 Purchase with a Partial Point Buy-Down

A buyer contracts at $650,000 with 10% down, producing a loan amount of $585,000. The lender quotes 7.50%. The seller offers $8,775 in concessions. The buyer directs all of it toward a rate buy-down.

Step 1. Calculate points purchased.

$8,775 / $585,000 = 0.015, which equals 1.5 points.

Step 2. Determine the reduced rate.

At 0.25 percentage points per point, 1.5 points reduces the rate by 0.375 percentage points.

7.50% - 0.375% = 7.125%

Step 3. Calculate monthly payment difference.

Monthly payment at 7.50% on $585,000: $4,093.

Monthly payment at 7.125% on $585,000: $3,940.

Monthly savings: $153 per month.

Step 4. Calculate breakeven.

$8,775 / $153 = 57 months (4 years, 9 months).

Net savings over a 10-year hold: ($153 x 120 months) - $8,775 = $9,585.

Temporary Buy-Downs: A Different Calculation

A temporary buy-down, such as a 2-1 buy-down, reduces the rate for the first two years only. In a 2-1 structure, the rate sits 2 percentage points below the note rate in year one and 1 percentage point below in year two. The seller funds the difference between the reduced payment and the actual payment for those 24 months.

Seller cost of a 2-1 buy-down = Sum of the payment differences over the reduced period.

On a $360,000 loan at a 7.25% note rate, year-one payments at 5.25% equal $1,988 per month. The actual payment at 7.25% is $2,457. The seller covers $469 per month for 12 months, or $5,628. Year two at 6.25% produces a payment of $2,218. The seller covers $239 per month for 12 months, or $2,868. Total seller cost: $8,496.

The 2-1 buy-down does not reduce the note rate. It front-loads cash flow savings. Use it only if you expect to refinance or sell before the rate steps up to the full note rate, or if you anticipate income growth that makes the higher payment manageable in year three.

IRS and Seller Concession Limits

The IRS treats seller-paid points on a buyer's primary residence as prepaid mortgage interest. The buyer can deduct points paid by the seller in the year of closing, provided the buyer itemizes deductions on Schedule A. The points must appear on the Closing Disclosure.

Conventional loans backed by Fannie Mae and Freddie Mac cap seller concessions at 3% of the purchase price when the down payment is below 10%, 6% when the down payment is between 10% and 25%, and 9% when the down payment exceeds 25%. FHA loans cap seller concessions at 6% of the purchase price. VA loans cap them at 4%. These caps limit the maximum points a seller can fund, so calculate your maximum buy-down amount against the applicable cap before negotiating.

How to Structure the Ask in a Negotiation

Do not ask the seller for a "rate buy-down" in the abstract. Ask for a specific dollar figure in seller concessions directed toward discount points. Get your lender's current point pricing before writing the offer. Then calculate the precise amount that achieves your target rate, and insert that number into the purchase agreement under seller-paid closing costs.

Sellers respond to specific, documented requests more readily than to vague concession language. A request for "$7,200 toward discount points to reduce the buyer's rate from 7.25% to 6.75%" is a concrete, verifiable ask. It also signals to the seller that the buyer is financially prepared, which can support the offer's overall strength.

Run the Full Calculation in the CalcMoney Mortgage Calculator

The breakeven formula and monthly payment differences above are straightforward to compute manually. But the real decision requires comparing multiple scenarios simultaneously. The CalcMoney Mortgage Calculator lets you input the loan amount, market rate, and point cost, then see the exact breakeven month, total interest paid under each scenario, and net savings at any holding period you specify.

Enter your actual loan amount, your lender's quoted rate, and the point pricing from your Loan Estimate. Then set the seller concession amount. The calculator produces the breakeven comparison in seconds.

Open the CalcMoney Mortgage Calculator and model your seller buy-down now →

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.