Should you offer a price cut or a rate buydown on your Denver deal? If you are buying, you want a payment you can live with. If you are selling, you want to protect value while still attracting offers. In this guide, you will see how each option works, when to use it, and a simple Denver-sized example that shows the tradeoffs. Let’s dive in.
What is a rate buydown?
A rate buydown is money paid at closing to lower your mortgage interest rate or monthly payments. The funds can come from the seller, builder, lender, or buyer. You will see this documented as discount points or as a temporary buydown shown as a seller concession on the closing documents.
Temporary buydowns (2-1, 1-0)
A temporary buydown lowers your monthly payment for a set period, often the first one to two years. For example, a 2-1 buydown reduces the effective payment by about 2 percent in year one and 1 percent in year two before the payment steps up to the full note rate. Lenders usually require the buydown funds to be placed in an escrow or similar account at closing to cover the future payment subsidy. You need to confirm how your lender will qualify you for underwriting because some must use the full note rate.
Permanent buydowns via discount points
A permanent buydown uses one-time points paid at closing to lower the rate for the life of the loan. As a simple rule of thumb, one point is about 1 percent of the loan amount and might reduce the rate by roughly 0.25 percent, but the exact tradeoff changes by day and lender. Permanent buydowns can cut total interest paid over time, but they only pay off if you keep the loan long enough to recoup the upfront cost.
What is a price cut?
A price cut reduces the contract purchase price. That lowers the loan amount for the buyer and increases their equity on day one. Price cuts can also help with appraisal risk if the original contract price was above comparable sales. Unlike a buydown, a price cut directly changes the recorded sale price.
A simple Denver example
Below is an illustrative scenario to compare the two options. Numbers use standard mortgage math and are for example purposes only. Exact pricing depends on your lender’s current rate and point grid.
- Purchase price: 600,000 dollars
- Down payment: 20 percent (120,000 dollars)
- Loan amount: 480,000 dollars
- Base rate (no buydown): 6.50 percent on a 30-year fixed
- Approximate effect of 1 discount point: about a 0.25 percent rate drop, but varies by lender
Monthly payment comparison for principal and interest only:
- At 6.50 percent → about 3,036 dollars per month
- At 6.25 percent (roughly one point buydown) → about 2,956 dollars per month
- Monthly savings → about 80 dollars
- Annual savings → about 960 dollars
- Payback of a 4,800 dollar point (1 percent of the loan) → about 5 years
Equivalent price cut:
- A 4,800 dollar price cut reduces price to 595,200 dollars
- With the same 20 percent down, the loan becomes about 476,160 dollars
- The buyer’s payment drops slightly because the loan is smaller, and the buyer gains immediate equity equal to the price reduction
Key takeaways:
- A buydown mainly helps your monthly cash flow and can lower total interest if you hold the loan long enough.
- A price cut boosts instant equity and may help with appraisal comparisons.
- Temporary buydowns give early payment relief but do not change the note rate permanently, which can be useful if you expect to refinance or your income to rise.
Pros and cons for buyers and sellers
Pros of seller-paid buydowns
- Expands the buyer pool by improving monthly affordability without changing the contract price.
- Can be structured for short-term relief, like a 2-1 buydown, which is useful if a refinance is likely.
- Keeps the recorded sale price intact, which can support comparable values.
Cons of seller-paid buydowns
- Seller concessions are capped by loan program and loan-to-value rules, and buyers may still have to qualify at the higher note rate.
- Requires seller cash at closing and added documentation.
- If the buyer refinances early, permanent points may be a poor use of funds because the buyer keeps the benefit.
Pros of price cuts
- Simple, transparent value for the buyer through immediate equity.
- Can reduce appraisal risk if earlier pricing is above market.
- Avoids the complexity of underwriting and escrow requirements tied to buydowns.
Cons of price cuts
- Cuts seller proceeds and can influence neighborhood comps.
- Large cuts may signal distress and draw low offers.
Lender, appraisal, and program rules to know
- Underwriting and qualifying: Ask your lender whether you will be underwritten at the note rate or if a temporary buydown payment schedule can be used. For temporary buydowns, lenders often require an escrowed account to fund the payment subsidy.
- Seller concessions: Seller-paid points and buydown funds count as concessions. Maximum concession limits vary by loan program and loan-to-value. Confirm the cap with your lender before you finalize terms.
- Appraisals: Appraisers focus on market value and comparable sales. A buydown does not change the contract price and typically does not impact the appraised value directly. Large concessions can raise questions about inducements, so expect documentation.
- Taxes and accounting: The treatment of discount points and seller-paid points depends on the situation and program rules. Buyers and sellers should consult a qualified tax professional.
- Local marketing rules: Denver-area MLS and association rules may limit how you advertise interest rate incentives. Confirm compliance before promoting specific rate claims.
When each strategy works best in Denver
- Rate-sensitive buyers: First-time buyers or anyone close to qualifying often value a buydown because it directly improves monthly payments.
- Investors and long-hold buyers: If you care most about total return and long-term equity, a price cut is often cleaner and more compelling.
- In hot submarkets: When days on market are low and buyers are competing, highlighting a buydown can help your listing stand out without changing the price band.
- In a softer segment: If inventory is building and buyers have options, straightforward price cuts usually move the needle faster.
- Price-band strategy: Small price moves that cross common search thresholds can boost visibility. You can combine a visible price adjustment with a targeted buydown to appeal to both bargain hunters and payment-focused buyers.
Negotiation plays that work now
- Try a short-term buydown first: Offer a 2-1 buydown to improve first-year and second-year payments. Pair it with a modest price adjustment if showings are slow.
- Protect comps while widening reach: Keep the contract price steady on paper with a seller-paid buydown to support neighborhood values, while solving the buyer’s payment pain.
- For speed in a soft pocket: If your Denver submarket is slowing, a small but strategic price cut often drives faster engagement than a complex concession structure.
- Confirm with the lender upfront: Before you advertise any buydown, get a written rundown from the lender on qualification rate, escrow treatment, and how it will show on the Closing Disclosure.
Quick decision checklist
If you are buying
- Clarify your priority: lower monthly payment now or more equity at closing.
- Ask your lender to show the exact rate-and-point tradeoff and the payback period for permanent points.
- If considering a temporary buydown, confirm the qualifying rate and escrow process.
- Consider your timeline: If you plan to refinance soon, a temporary buydown may be better than paying permanent points.
If you are selling
- Map your buyer pool: Is it payment-sensitive or equity-focused in your price band?
- Check concession limits for likely buyer loan types so you do not offer more than the program allows.
- Review comps and search-price thresholds. A small price move can unlock more online visibility.
- Compare net proceeds with a price cut versus funding a buydown, including closing costs and any concession caps.
Bottom line for Denver deals
Both tools can work. A buydown targets monthly affordability and can expand your buyer pool without changing the recorded price. A price cut delivers instant equity and can simplify the appraisal path. The right move depends on your goals, loan program limits, and current conditions in your specific Denver submarket.
If you want a clear read on which option will net you more, let’s walk through the numbers together. Reach out to Chelsey Franklin for a tailored comparison that matches your loan scenario and neighborhood comps.
FAQs
Which is better in Denver, a buydown or a price cut?
- It depends on your goal. Choose a buydown for monthly affordability or a price cut for immediate equity and appraisal simplicity, and match the choice to current submarket conditions.
How do 2-1 temporary buydowns work on Denver mortgages?
- A sponsor funds an escrow that reduces your payment by about 2 percent the first year and 1 percent the second year before the payment steps up to the full note rate.
Do seller-paid buydowns affect a Denver appraisal?
- Typically no. Appraisers base value on comparable sales and market value, not financing concessions, though large concessions may require documentation.
What are the limits on seller concessions in Denver?
- Concession caps vary by loan program and loan-to-value and can change. Confirm the maximum allowed with your lender before negotiating terms.
If I plan to refinance soon, should I seek a buydown or a price cut?
- A temporary buydown often makes sense for short horizons, while permanent points pay off only if you keep the loan long enough to recoup the upfront cost.
How are discount points treated for taxes in Colorado home purchases?
- Tax treatment of discount points and seller-paid points is fact-specific and program driven. Consult a qualified tax professional for guidance.
