Eyeing a Kentfield home but the monthly payment gives you pause? In a high-price market like Kentfield and Greenbrae, a well-structured rate buydown can create breathing room without losing the home you want. You will learn how permanent points and temporary buydowns work, what they cost, and how to use them in negotiations on higher-priced homes. Let’s dive in.
Rate buydown basics
A mortgage point is 1% of your loan amount. You can pay points, buy down your rate, to reduce your interest rate permanently or to fund a temporary payment subsidy for the first few years.
- Permanent buydown: You pay points at closing to lower your rate for the life of the loan. The rate reduction per point varies by lender and market. I recently experienced some one buying down the rate from 7.250% to 6.500% on an investment property for 3 points.
- Temporary buydown: A 2-1 or 3-2-1 structure lowers your payment for the first 1 to 3 years, then it returns to the full note rate. The subsidy is funded as a lump sum at closing and held in escrow. Sellers, builders, or you can fund it.
Most lenders qualify you at the full note rate. That means a buydown often improves cash flow but does not increase how much you qualify to borrow. Confirm with your lender.
Permanent vs. temporary
Permanent points buydowns. Paying discount points
- What you get: A lower interest rate for the life of the loan and long-term interest savings. Some would look at it as paying the interest upfront
- What it costs: Up-front cash at closing. The break-even usually takes years, so it fits best if you expect to keep the loan for a while.
- How to evaluate: Ask your lender for a rate sheet that shows the note rate with zero points and the cost to reach lower rates. Use break-even math to guide your choice.
Temporary 2-1 and 3-2-1
- What you get: Big payment relief in the early years. A 2-1 buydown reduces your payment by about 2 percentage points in year one and 1 point in year two. A 3-2-1 stretches that to three years of step-ups before reaching the full rate.
- What it costs: A lump sum equal to the present value of the payment differences in the buydown period. Lenders compute this for you and require the funds at closing.
- When it fits: If you expect higher income later, plan to sell a prior home, or anticipate refinancing within a few years, temporary relief can be attractive.
Illustrative Kentfield numbers
Assume a $1,500,000 purchase, 20% down, and a $1,200,000 loan. Without any buydown, the note rate is 6.50% on a 30-year fixed.
- 1 point costs $12,000.
- Payment at 6.50% is about $7,585 per month for principal and interest.
If you pay 1 point and drop the rate by 0.25 percentage point to 6.25%:
- New payment is about $7,389.
- Monthly savings is about $196.
- Break-even is roughly $12,000 divided by $196, or about 61 months, which is a little over 5 years.
If you use a 2-1 temporary buydown at the same note rate:
- Year 1 at 4.50% is about $6,080 per month, which is about $1,505 less than the note payment.
- Year 2 at 5.50% is about $6,814 per month, which is about $771 less.
- Starting year 3, the payment returns to the note rate of $7,585.
- The lump-sum subsidy is roughly the total of the first two years’ savings, or about $27,324. That is about 2.28% of the loan amount. Lender calculations may differ.
These examples are for illustration. Always get current lender quotes to compare exact pricing.
Which approach fits your plan
If you plan to keep the loan long term, paying points for a permanent rate reduction can create durable savings. The tradeoff is a longer break-even period and higher up-front cash. We have been seeing sellers offer credits to buyers, to offset the cost of buyers paying discount points to lower their rate.
If you expect to refinance, sell, or see income rise in the next 1 to 3 years, a temporary buydown can smooth the transition and keep monthly costs lower in the near term. It is often effective for move-up buyers managing cash while a prior home sells.
Many Kentfield and Greenbrae purchases involve jumbo loans. Jumbo pricing and concession rules can differ from conforming loans, so your lender’s program details matter.
Jumbo loans and program rules in Marin
In Kentfield and across most of Marin, prices often push loans above conforming limits. Jumbo loans may price points differently and can have stricter rules for seller concessions. Ask your lender whether your loan is conforming or jumbo and to outline program-specific limits.
- Seller concessions: A seller-funded buydown is treated as a concession and reduces seller net proceeds. Loan programs limit concessions to a set percentage. Limits vary by loan type and down payment.
- Qualification and reserves: Many lenders qualify at the full note rate even with a temporary buydown. Reserve requirements usually do not change just because you use a buydown.
- Appraisal and price: Concessions do not directly change appraisal value. If you raise price to offset a seller credit, watch for appraisal gaps.
Negotiate a seller-funded buydown
A seller credit toward a buydown can be a smart tool, especially on higher-priced homes.
- Read the market: If a listing sits or the market is neutral, sellers may be open to concessions. In a hot multiple-offer situation, asking for a large credit can reduce competitiveness.
- Price vs. net: One approach is to propose a slightly higher offer price with a seller credit for closing costs, then apply that credit to the buydown if the program allows. Appraisal and program limits still apply.
- Offer alternatives: Give sellers a choice. A price reduction or a buydown credit can reach similar net results. Some sellers prefer credits to preserve comparable pricing.
- Competitive tactics: Consider splitting costs, where you pay some points and the seller funds the rest. Keep contingencies clean and spell out how the credit will be applied.
- Equity advantage: If you have strong equity, you can pay for permanent points yourself. This keeps your offer clean and can be more attractive to sellers.
- Timing and clarity: Request the credit in your initial offer and include a buydown addendum that specifies the amount, who funds it, how funds are held, and the reduced payment schedule.
Underwriting, tax, and paperwork
Most lenders underwrite at the note rate. Some may allow qualifying based on the reduced payment in specific cases, but this varies. Confirm how your lender will calculate your debt-to-income ratio.
For taxes, points you pay on a primary residence are often deductible as mortgage interest under IRS rules. Points paid by a seller are not deductible by you. The tax treatment of temporary buydowns is more complex. Consult your CPA for guidance.
Use a proper buydown addendum in the purchase agreement. It should show the total buydown amount, who is providing funds, where funds will be held, and the schedule of reduced payments.
The bottom line for Kentfield buyers
Rate buydowns are a practical way to align a Kentfield home purchase with your cash flow. Permanent points can deliver lasting savings if you plan to keep the loan, while temporary buydowns can bridge the early years or carry you to a future refinance. In a market with many jumbo loans and nuanced seller dynamics, the right structure can strengthen your offer and your budget.
If you want help modeling scenarios or crafting a clean offer strategy, reach out to Team O’Brien - David & Deirdre for a quick consultation.
FAQs
How do rate buydowns work on jumbo loans in Marin
- Jumbo programs may price points differently and can cap seller concessions at different levels than conforming loans, so confirm limits and costs with your specific lender.
What does a 2-1 buydown cost on a $1.2M loan
- In an illustrative scenario, the lump sum is roughly the total first two years’ payment savings, about $27,324, which is about 2.28% of the loan. Lender calculations can vary.
Will a temporary buydown help me qualify
- Often no, because many lenders still qualify you at the full note rate, though some programs may allow qualifying at the reduced payment in limited cases.
Can I ask the seller to pay for the buydown in a competitive offer
- You can, but in multiple-offer situations a large seller credit can weaken your position, so consider splitting costs or offering a slightly higher price with a credit, subject to appraisal limits.
Are mortgage points tax deductible if I buy in Kentfield
- Points you pay on a primary residence are often deductible as mortgage interest under IRS rules, while points paid by the seller are not deductible by you. Ask your CPA for specifics.
