What’s the Smarter Play? Using $20,000 Toward a Rate Buydown vs. a Loan Reduction
When you’re buying a home, especially in a balanced or buyer’s market, chances are you’ll negotiate with the seller for some kind of financial benefit - whether that’s a credit at closing or a reduction off the list price. The big question becomes: what’s the best way to ask for or use that money if the seller agrees to it?
Let’s run the numbers with a $1,000,000 home purchase and assume you’re able to negotiate $20,000 from the seller.
Assumptions for the Example
Home Price: $1,000,000
Down Payment: 20% ($200,000)
Loan Amount: $800,000
Loan Term: 30 years fixed
Standard Interest Rate: 6.5%
Option 1: Apply $20,000 to Reduce the Loan Amount
If the $20,000 is used to reduce the loan balance, the buyer is now borrowing $780,000 instead of $800,000.
Monthly Payment (6.5% rate): $4,930
Savings Compared to Full Loan ($800K): About $127/month
Total Interest Over 30 Years: ~$994,847
So yes, it lowers the payment — but only by a little each month... no too significant.
Option 2: Use $20,000 for a 2-1 Temporary Rate Buydown
In this scenario, the seller’s $20,000 credit is used to lower the buyer’s interest rate temporarily:
Year 1: 4.5% interest → Payment = $4,053
Year 2: 5.5% interest → Payment = $4,542
Year 3+: Standard 6.5% interest → Payment = $5,057
Total Interest Over 30 Years (with early savings): ~$1,002,148
This strategy saves the buyer a whopping $1,003/month in Year 1 and $514/month in Year 2 compared to the standard loan payment.
Option 3: Do Nothing (for comparison’s sake)
Monthly Payment (6.5% rate, $800K loan): $5,057
Total Interest Over 30 Years: ~$1,020,356
Which Option Is Better?
For buyers, a temporary rate buydown is typically the better option because it delivers significant short-term payment relief when cash flow matters most, while still preserving the ability to refinance later for long-term savings.
Loan Reduction ($20K off balance): Permanent savings of ~$127/month and ~$25,500 less interest over 30 years.
2-1 Buydown ($20K credit): Temporary, but dramatically larger savings in the first two years (over $18,000 combined), while still saving about ~$8,200 in total interest over the life of the loan compared to doing nothing.
Standard Loan (no credit): Higher payments from the start and the most interest over time.
Why This Matters for Sellers
When a seller offers a $20,000 credit, the real question isn’t “what’s fair?” but rather “what moves the needle for buyers?”
A loan reduction is a nice-to-have, but it doesn’t really make a buyer’s jaw drop.
A temporary rate buydown, on the other hand, creates a significant psychological and financial impact — lowering payments by hundreds (or even a thousand) dollars a month during the crucial first years of ownership.
That kind of incentive can be the difference between a buyer stretching to say yes versus walking away.
From a seller’s perspective, the better use of that $20,000 is almost always the temporary rate buydown. It gives buyers meaningful, short-term payment relief, helps your home stand out in the market, and makes the credit feel far more valuable than a small permanent payment reduction.
And if rates drop in the meantime? Buyers can refinance, capture long-term savings, and remember you as the seller who made their first years of ownership much smoother.
These figures are provided for illustrative purposes only and should not be relied upon as financial advice please consult a licensed mortgage professional for exact payments, rates, and loan terms specific to your situation.
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