What this article covers
Over lunch with his longtime mortgage banker, Opher Ganel learned how home sellers are helping buyers close in a market where low-rate “golden handcuffs” keep inventory thin and payments high. He works through the numbers on three options: a seller’s assist toward closing costs, a permanent seller-paid rate buydown and a cheaper temporary buydown for the first two years. Two financial advisors then share how seller-paid rate buydowns worked out for real buyers and sellers.
Key Takeaways
A seller’s assist can cut the cash a buyer needs at closing by thousands
On a $400k home with $10k in buyer closing costs, raising the price to $410k and having the seller cover those costs lowers the cash needed at closing from $90k to $82k. The trade-off is a $54 higher monthly payment at 7% and about $19.2k more in total payments over 30 years, and the appraisal must support the higher price.
A permanent seller-paid rate buydown suits buyers who plan to stay for many years
Buying the rate down by 0.5 to 0.75 percentage points can cost up to a few percent of the price. In Opher’s example, cutting a 7% rate to 6.25% lowers principal and interest from $2,128 to $1,970 a month, about $1.9k a year, and one advisor describes sellers who bought down a buyer’s rate by 1.5% instead of cutting their price, with the same net result for them.
A temporary rate buydown gives buyers bigger early payment relief for less money
Buying the rate down 2% in year one and 1% in year two drops a $2,128 payment to $1,718 and then $1,919, saving the buyer about $7.4k, which is roughly what the seller would pay. It fits buyers who can cover the down payment and closing costs but need lower payments now and expect to refinance or earn more later.
Anthony Ferraiolo
Melody BradyI’ve known him since 2000 when I got his name and phone number from a friend.
Back then, he was the mortgage banker who helped me buy my first home. Since then, he has helped me with a dozen or more mortgage loans, some for purchases and most for refinancing.
And because he’s so helpful and friendly, we became friends.
We met for lunch recently and talked about a wide range of things, updating each other on personal stuff and talking about how crazy the current environment is for mortgage lenders.
As he described it, these days, 90% of homeowners with a mortgage have fixed rates below 4%, making those great mortgages “golden handcuffs” that keep them from selling unless they’re forced to do so.
Here’s why…
As of this writing, 30-year fixed-rate mortgages charge a national average of just over 7%.
According to Redfin, in December 2023, the national median home price was over $402k.
Imagine homeowners who bought a house in early 2021, when rates were sub-3%, at the then-median price of $350k.
Assuming a 20% down payment, their principal and interest payment would be $1,180. If they were to sell their house today for $402k, they’d get about $106k after 10% closing costs and paying off their $255.5k mortgage balance.
If they then used the full $106k as their down payment on a new, 7% 30-year fixed-rate mortgage, their new principal and interest payment would be $1,969, nearly 67% higher than their current payment.
Annually, they’d have to shell out nearly $9.5k more!
As a result, the supply of homes on the market is very slim.
Add to that the impact of high real estate prices and high (relative to recent history) interest rates, and there aren’t very many buyers, though there are still enough buyers to make it a strong sellers’ market (a balanced market is when there is a 5–7 months’ supply of homes for sale; currently that number is under 1.5).
As a result, mortgage lenders are desperately short of loans to write.
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How Can Home Sellers Help Buyers Afford a Home? 3 Ways
Here are three ways sellers can increase the odds of buyers being able to close the deal.
Way 1: A Seller’s Assist Toward the Buyer’s Closing Costs
The first, most well-known way, is for the seller to offer a few thousand dollars in “closing assistance” also known as “seller’s assist.”
This can work as follows.
Say the buyer’s portion of closing costs adds up to $10,000. The seller and buyer agree to increase the sale price by $10,000, and the seller then covers the $10,000 buyer’s closing costs.
What are the implications for a $400k initial price?
- The sale price increases 2.5% to $410k.
- The 20% down payment increases by $2k from $80k to $82k, far less than the $10k buyer’s closing costs would have otherwise been.
- As a result, instead of having to come to closing with $90k ($80k down payment plus $10k closing costs), the buyer needs only $82k, making it easier to afford the property.
- The mortgage amount increases from $320k to $328k, and principal and interest for a 7% loan go up from $2,128 to $2,182 — a $54 per month increase.
- The total payments, assuming the buyer keeps the mortgage until it’s paid off, grow from $766.4k to $785.6k, an extra $19.2k over 30 years (ignoring the effects of inflation and tax deductions).
In more balanced markets and buyers’ markets, a seller may be willing to offer so-called “closing concessions” of several thousand dollars toward the buyer’s closing costs without increasing the sale price to stand out from competing properties.
Note that there are legal limits to how much a seller can offer in closing cost assistance or concessions, and if the sale price is increased, the appraisal needs to be high enough to cover the new price.
Way 2: A Permanent Seller-Paid Interest Rate Buydown
The second way we discussed is related.
Here, rather than paying for, e.g., the buyer’s portion of taxes and fees, the seller helps the buyer “buy down” the interest rate for the life of the loan.
This can cost up to a few percent of the property price for a reduction of, say, 0.5–0.75%, which could lower rates from, say, 7% to 6.25–6.5%.
This sort of assistance is most helpful if the buyer can come up with the down payment and closing costs, is planning to stay in the home for many years, and is concerned about the monthly payments over the long haul.
Reducing the interest rate from 7% to 6.25% would drop the monthly principal and interest payment on a $400k home from $2,128 to $1,970, potentially saving the buyer $1.9k a year.
Here again, the seller could tack on the cost of the assistance to the sale price, or if they’re more motivated, they could swallow this cost to sweeten the deal.
Way 3: A Temporary Rate Buydown for the First Two Years
The third way my friend described was new to me…
For less money than the above second method, the seller can (and some do) buy down the buyer’s interest rate by far more, if it’s for a much shorter period.
For example, instead of buying the rate down by 0.5–0.75% for 30 years, they can buy the rate down by, say, 2% for the first year and 1% for the second year.
After that, the rate reverts to the original 7% (in our example).
For a $400k home, this would drop the first two years’ payments from $2,128 as follows:
- Year 1: $1,718, saving the buyer $410 a month or $4,920 for the year.
- Year 2: $1,919, saving the buyer $209 a month or $2,508 for the year.
If the bank charges the seller the amounts saved for the buyer, this will cost $7.4k, which, again, the buyer could tack on to the home price (slightly increasing the payments), or swallow the cost to sweeten the deal.
This method is most helpful for buyers who can come up with the down payment and closing cost, but who need much lower monthly payments.
The reduction is only for the first couple of years, but the buyers may expect interest rates to drop by then, at which point they’d refinance the loan. Or, they may expect to get a promotion and salary increase.
Depending on how desperate the buyers are to lower their monthly bill and how confident they are that rates will drop, they could do this with an adjustable-rate mortgage (ARM), where the initial few years’ rates are already substantially lower than for a 30-year fixed-rate loan.
For example, as of this writing, 5/1 ARM rates are about 1.14% lower than 30-year rates. Buying down 2% from that lower level for Year 1 could lower the first year’s payments to $1,556, for a monthly reduction of $572, or 27%!
Seller-Paid Rate Buydowns in Practice: Stories from Financial Advisors
Anthony Ferraiolo, Partner Advisor of AdvicePeriod, relates to a situation where a buyer managed to get the seller to help using the second method above, buying down the buyers’ rate, “A young couple was buying their first, hopefully forever home. They were well within budget but wanted to soften the blow to their monthly income. I suggested they do two things: (1) Ask for seller assistance to buy down the rate. (2) Ask if the seller had an assumable loan. Unfortunately, they couldn’t find a home with an assumable loan, where they’d be able to take advantage of the seller’s lower rate. However, the seller of the home they ended up buying agreed to buy down their rate, saving them hundreds of dollars a year.”
Melody Brady, Founder of Beechmont Financial, shares a story from a seller’s perspective:
I had clients who were struggling to sell their home. We did the math, and they ended up buying down the buyer’s rate by 1.5% rather than dropping the price of their home. The net result was the same for them, but the buyer saved thousands a year on the mortgage payment.
The Bottom Line: Seller Help Can Lower Closing Costs or Monthly Payments
Especially with the current high real estate prices and mortgage interest rates, buyers may find themselves stretched to the limit and beyond to afford to buy a home.
The above offers three ways sellers can help a buyer who’s constrained by either lowering the closing costs or the monthly payments.
Frequently Asked Questions
What is a seller’s assist when buying a home?
A seller’s assist (or closing assistance) is money the seller puts toward the buyer’s closing costs. A common approach is to raise the sale price by the amount of the buyer’s closing costs and have the seller pay them, so the buyer brings less cash to closing in exchange for a slightly larger mortgage. In balanced or buyers’ markets, a seller may offer closing concessions without raising the price.
Is there a limit on how much a seller can contribute to a buyer’s closing costs?
Yes. The article notes there are legal limits on how much a seller can offer in closing cost assistance or concessions. If the sale price is increased to cover the assistance, the home’s appraisal also needs to come in high enough to support the new price.
Can a seller pay to lower a buyer’s mortgage interest rate?
Yes. A seller can help the buyer buy down the interest rate for the life of the loan, which can cost up to a few percent of the property price for a reduction of about 0.5 to 0.75 percentage points. The seller can add that cost to the sale price or absorb it to make the deal more attractive, and one advisor interviewed described sellers who chose a 1.5% rate buydown instead of a price cut.
How does a temporary interest rate buydown work?
The seller pays to lower the buyer’s rate sharply for a short period, for example by 2% in the first year and 1% in the second, after which the rate returns to the original level. It costs less than a permanent buydown and gives bigger early savings, so it suits buyers who need lower payments now and expect rates to fall (so they can refinance) or their income to rise.
Why are so few homes for sale when mortgage rates are high?
Many homeowners hold mortgages with rates far below current rates, which act as “golden handcuffs”. In the article’s example, a couple who bought in early 2021 and moved to a new 7% mortgage would see their principal and interest payment rise about 67%, or nearly $9.5k a year, so many owners don’t sell unless they have to.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.