2/1 rate buydown vs $15,000 price cut

What if we compare asking the seller for credits vs asking for a price reduction?
Specifically: a 2/1 rate buydown vs a $15k price cut. When I ran the numbers, the results surprised me.

Quick explanation:
A 2/1 rate buydown temporarily lowers your interest rate by 2% in year one and 1% in year two. After that, your rate stays the same for the rest of the loan. How can we do that? We ask the seller for the credits back. And what they essentially do is prepay your interest for those first two years.

So here is an example:
On a $700k home, a 2/1 buydown costs about $15k.

So what’s better?

• Buy at $700k and get $15k back, lowering your payment by about $800/month in year one and $400/month in year two.


• Or reduce the price to $685k? Because the less money you borrow from the bank, the less interest you pay over the life of the loan.

But here’s the thing: if you borrow an extra $15k at 6% interest over 30 years, you’ll pay about $17k in interest alone, plus the $15k you borrowed—for a total of roughly $32,000 paid to the bank.

So here is the bottom line.

If having a lower monthly payment is a priority, a rate buydown can help.

If not paying interest to the bank matters more, a price reduction is a better option.