You’re buying a home and negotiating with the seller when you ask for some concessions. The seller agrees to use some of their cash to sweeten the deal. Now, it’s up to you to decide which concessions will give you the most value.
Here’s what you need to know as you weigh your options.
The three ways to use seller concessions
When a seller is willing to work with you to make a home more affordable, there are three main ways they can help you out.
First, they can give you a closing cost credit. This is up-front cash that covers some or all of your closing costs, reducing the amount you need to bring to the closing table. The credit might cover standard closing expenses, such as title insurance or appraisal fees, or it could go toward prepaying other costs at closing, like homeowners insurance premiums.
Second, the seller can pay for either a temporary or a permanent rate buydown. To temporarily buy down the interest rate, the seller deposits money in an escrow account, and the funds are used to cover some of your interest during the buydown period of one to three years. A permanent rate buydown involves paying the lender discount points at closing in exchange for permanently lowering the interest rate you’re charged.
Finally, the seller can give you a price reduction. Lowering the purchase price of the home reduces the amount you have to borrow and can slightly lower your down payment and monthly mortgage payment.
→ Read more: Seller concessions vs. credit
The math — what each option actually saves you
Let’s look at an example to see how these seller concessions compare. Suppose you’re buying a $400,000 house with a 5% down payment and using a 30-year conventional loan at a 7% interest rate. The following table shows the math, using calculations from RMC Home Mortgage.
A closing cost credit lowers your up-front costs, but it does not affect the monthly payment or result in any additional savings over time. A permanent buydown reduces the monthly payment and may be worthwhile if you’re going to keep the mortgage long-term. A 2-1 buydown reduces the monthly payment more significantly during the first year, but because the effect is short-lived, it’s best if you plan to move or refinance. And a price reduction results in small decreases in both the down payment and the monthly payment.
When to choose a closing cost credit
Consider asking for a closing cost credit when you’re having trouble coming up with enough cash to close. You can expect to pay 2% to 5% of the loan amount in closing costs, or $7,600 to $19,000 on a $380,000 loan. If you’re not able to raise those funds from friends or family, a seller concession could be a good alternative.
A closing cost credit can also be helpful if you have other up-front expenses related to your move. For example, maybe the home needs minor repairs or upgrades, and you want to take care of them yourself rather than wait for the seller to get them done. You could negotiate a closing cost credit, then use the money you would have spent on closing costs to pay for the work on the home.
When to choose a rate buydown
A rate buydown can be a worthwhile concession when interest rates are high.
If you’re planning to keep your mortgage for several years, you might want a permanent buydown. This lowers the rate you pay for the life of the loan, and, as a result, your monthly payment is permanently lower. The savings can add up significantly over time.
A temporary rate buydown can give you an even larger reduction in your monthly payment, but it’s only in effect for two or three years at most. Buyers might prefer this option if they’re confident they can refinance to a better rate at the end of the buydown period, or if they don’t plan to stay in the home very long.
“Maybe they’re moving to another state, or they know they’re going to be reassigned to another position within a short period of time. That [temporary] buydown then makes it very affordable,” said Chris Parks, Sales Manager at Churchill Mortgage.
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When to choose a price reduction
A price reduction can make sense when you’re interested in reducing the total amount you borrow. Maybe you’re just at the threshold of needing a jumbo loan, and you’d prefer to borrow a little less and get a conventional loan. Or maybe you have nearly enough saved for a 20% down payment to avoid paying private mortgage insurance, and a price reduction would bump up your down payment to 20% of the new loan amount.
→ Read more: Jumbo loans: How to buy a higher-priced house
Parks typically sees price reductions appeal to buyers who want to pay off their debt as soon as possible.
“That type of buyer tends to be very, very aggressively wanting to eliminate debt, and so those people will take advantage of the early payoff calculators that I give them and other things like that because they really want to eliminate debt quickly,” Parks said.
Can you ask for more than one?
You can ask to combine seller concessions, with the caveat that the value of the concessions can’t be higher than the maximum for the type of loan you’re taking out. The maximum concessions are a percentage of the purchase price, or in some cases, the appraised value.
“If they’ve negotiated a very sweet deal as far as seller concessions, we try to do the permanent rate buydown as much as we can, and then with whatever’s left over, what we try to do is we try to reduce the price. That’s the most common way we see it,” Parks said.
Which is right for you?
Ask yourself these questions to see which seller concessions you’re likely to benefit from.
Do you have enough cash for closing? If not, consider a closing cost credit.
Are you facing a high interest rate, and do you plan to keep your home loan long-term? A permanent rate buydown could lower your monthly payment and save you interest over the life of the loan.
Are you looking to lower your interest rate but expecting to refinance soon? A short-term rate buydown can give you larger savings on your payments over the next year or two.
Is your down payment smaller than you’d like? A price reduction can lower the size of your loan so that your down payment goes further, perhaps eliminating the need for PMI if your down payment was just under 20% of the original price.
Is the seller very motivated to negotiate? If you see a home that’s been on the market for 30 days or more, it could be in your interest to ask for a combination of concessions.
Rate buydown vs. closing costs vs. price reduction FAQs
Is it better to get a lower price or ask for closing costs?
The better option depends on your financial situation and goals. If you can easily cover closing costs yourself and want to limit how much debt you take on, you might prefer a price reduction. If you don’t have a lot of cash on hand, you might benefit more from help with closing costs.
Can seller concessions cover both a rate buydown and closing costs?
You can use seller concessions for both a rate buydown and some closing costs, but the total value of the concessions can’t exceed the maximum allowed concessions for the specific loan type.
Does a price reduction affect my down payment?
If you’ve decided to make a down payment equal to a certain percentage of the purchase price, then reducing the purchase price lowers the amount you have to put down. For example, suppose you’ve offered to buy a $400,000 home and are planning on a 5% down payment. At the full price, your down payment is $20,000. If the seller reduces the purchase price to $390,000, then your 5% down payment is $19,500.
Which is better for the seller — a price reduction or concessions?
Some sellers might prefer a price reduction because it lowers agent commission fees and transfer taxes, which are calculated as a share of the purchase price. But if you’re buying a home from a builder, the builder might prefer concessions over a price reduction. A price reduction could affect future appraisals of other properties the builder is selling nearby, limiting the prices they can charge later.
