Understanding Points Buydown vs. Rate Buydown: What Condo Buyers Need to Know

Buying a condo in San Francisco? With mortgage rates fluctuating, you might have heard about strategies to lower your interest rate and monthly payments. Two common options are points buydown and rate buydown, but they work in different ways. Understanding these options can help you make a smart financial decision when purchasing your home.

Best Opportunity for Buyers to Negotiate

While the single-family home market in San Francisco remains competitive, the condo market offers the best opportunity for buyers to negotiate favorable terms. With higher inventory and softer demand, buyers can often request seller concessions, such as rate buydowns or closing cost coverage, to make homeownership more affordable.

What Is a Points Buydown?

A points buydown involves paying upfront fees, known as discount points, to reduce your mortgage interest rate for the life of the loan. One discount point typically costs 1% of your loan amount and can reduce your interest rate by around 0.25%, though this varies by lender.

Key Benefits of a Points Buydown:

✔️ Lower Long-Term Interest Costs – Since the rate reduction applies for the entire loan term, you save more over time.
✔️ Great for Long-Term Homeowners – If you plan to stay in your condo for many years, the upfront cost can be worth the long-term savings.
✔️ Potential Tax Benefits – Mortgage points may be tax-deductible (check with your tax professional).

Example of a Points Buydown:

If you’re taking out a $900,000 loan with an interest rate of 7%, paying 3 discount points ($27,000) could reduce your rate to 6.25%. Over 30 years, this can lead to significant savings on interest payments.

Breakeven Analysis

To determine the breakeven period, divide the upfront cost by the monthly savings:

• Monthly payment at 7%: ~$5,987
• Monthly payment at 6.25%: ~$5,538
• Monthly savings: $449
• Breakeven period: $27,000 ÷ $449 ≈ 60 months (5 years)
• Total savings over 30 years: $161,640

What Is a Rate Buydown?

A rate buydown is a temporary reduction of your mortgage interest rate for the first few years, often paid by the seller, lender, or builder as an incentive to help buyers afford the home.

The most common example is a 2-1 Buydown, where:

• Year 1: The rate is reduced by 2% (e.g., 7% → 5%).
• Year 2: The rate is reduced by 1% (e.g., 6%).
• Year 3 and beyond: The original loan rate (e.g., 7%) applies.

Key Benefits of a Rate Buydown:

✔️ Lower Initial Monthly Payments – This can make homeownership more affordable in the early years.
✔️ Great for Buyers Expecting Future Income Growth – If you anticipate salary increases or other financial growth, a temporary buydown can help you ease into payments.
✔️ Often Seller or Lender-Funded – Unlike a points buydown, this is often covered by the seller or builder as an incentive, reducing out-of-pocket costs for buyers.

Example of a 2-1 Rate Buydown:

If you take out a $900,000 loan at 7% interest, your monthly payment would be $5,987. With a 2-1 buydown, your payments might look like this:

• Year 1 at 5%: ~$4,828/month
• Year 2 at 6%: ~$5,396/month
• Year 3+ at 7%: ~$5,987/month

This temporary relief can help buyers adjust financially before full payments begin.

Which Option Is Right for You?

• Choose a Points Buydown if you plan to stay in your condo long-term and want to save on interest over the life of your loan.
• Choose a Rate Buydown if you need lower payments in the first few years and expect future income growth.

With the current San Francisco condo market offering buyers the most room to negotiate, understanding these strategies can help you navigate today’s real estate market with confidence. Need guidance on financing options for your condo purchase? Let’s connect and explore the best path forward!

Thinking about buying a condo? Let’s find the best deal for you!