Mortgage rate buydowns are softening the affordability problem. 

by Rick Palacios, Jr., and Danielle Nguyen

It is customary for many buyers to pay a fee (0.25% to 0.5% of the mortgage amount) to lock in the current mortgage rate so that they can be assured of their mortgage payment before closing. However, the trend in the last year has been to have the seller pay a significantly higher fee to lock in a below-market rate for the buyer. Home builders have been the primary home sellers choosing this option, and more resale agents are talking their clients into offering this incentive as well—a topic covered in our recent podcast with Compass’ Chief Real Estate Strategist Mark McLaughlin.

As mortgage rates soar and it gets harder for people to afford homes, rate buydowns have become an increasingly common financing tool to drive sales and demand. We’ve written extensively about rate buydowns since December 2022.

Today, a seller contributing 4% of the home proceeds at closing can reduce the borrower’s payment by 10%. For many sellers who have benefitted from far more home price appreciation than they ever imagined, achieving 96% of today’s home value still results in a huge gain—and is far better than reducing the price by 10%. For buyers, a 10% lower mortgage payment means far more to them than a 4% lower home price. This is a win-win that varies by market and might be temporary.