When a home isn’t selling, one of the first questions sellers often ask is whether they should lower the asking price.
Sometimes, the answer is yes.
Every property has what economists refer to as a market-clearing price, the price at which a willing buyer and a willing seller can agree to a transaction under prevailing market conditions.
If a home is receiving adequate exposure but isn’t generating meaningful interest or offers, the market may be signaling that the asking price is higher than buyers are willing to pay.
This is part of the process economists call price discovery. We’ve explored that concept in our previous article, Is the Real Estate Market Finally Finding Its Clearing Price?, including how changing buyer demand and seller expectations are affecting the Greater New Orleans housing market.
However, finding the right price is only part of the equation.
Even when a property is competitively priced, buyers may struggle with the cash needed at closing or the monthly mortgage payment. That’s where seller incentives may offer another way to make a property more financially attractive.
Depending on the buyer’s financing, sellers may have options beyond reducing the asking price, including contributing toward closing costs or helping the buyer obtain a lower mortgage interest rate.
Understanding how these incentives work can help sellers make better decisions about pricing, negotiating, and positioning their properties in the market.
Closing-Cost Assistance vs. a Mortgage Rate Buydown
Suppose a homeowner is willing to contribute $10,000 toward making a transaction work.
There are several ways that money might be used, depending on the buyer’s financing and applicable lending guidelines.
Option 1: Closing-Cost Assistance
The seller contributes toward the buyer’s allowable closing costs and prepaid expenses.
This can reduce the amount of cash the buyer needs to bring to closing, allowing them to preserve savings for moving expenses, repairs, furnishings, or unexpected costs.
For buyers who have sufficient income to afford the monthly payment but want to preserve cash reserves, this can be particularly valuable.
Option 2: A Permanent Mortgage Rate Buydown
Instead of using the entire contribution toward ordinary closing expenses, some or all of the allowable seller concession may be applied toward discount points that permanently reduce the buyer’s mortgage interest rate.
This could lower the buyer’s monthly principal-and-interest payment for as long as they keep that mortgage.
The same seller contribution can therefore accomplish two very different objectives:
- Closing-cost assistance helps preserve the buyer’s cash at closing.
- A permanent rate buydown may reduce the buyer’s monthly mortgage payment over time.
Neither option is automatically better. The right choice depends on the buyer’s financial circumstances, mortgage terms, and long-term plans.
What Is a Permanent Mortgage Rate Buydown?
A permanent mortgage rate buydown generally involves paying discount points to a mortgage lender in exchange for a lower interest rate.
One discount point typically costs 1% of the loan amount, although the interest-rate reduction obtained for that point varies with market conditions and lender pricing.
For example, on a $300,000 mortgage, one discount point would cost $3,000.
However, that does not mean paying $3,000 will reduce the interest rate by any particular amount. The actual reduction must be determined by the lender.
A permanent buydown can provide savings throughout the life of the mortgage, assuming the borrower keeps the loan.
However, buyers should also consider how long they expect to own the property or retain the mortgage.
If they sell or refinance relatively soon, the savings from purchasing discount points may not be sufficient to justify the upfront cost.
That’s why comparing the upfront expense with the anticipated monthly savings, often called the break-even period, is important.
Permanent vs. Temporary Mortgage Rate Buydowns
Not all mortgage rate buydowns work the same way.
In addition to permanent buydowns, some lenders and builders offer temporary programs such as 2-1 and 3-2-1 buydowns.
These programs temporarily subsidize the buyer’s mortgage payment rather than permanently reducing the mortgage’s actual interest rate.
How a 2-1 Buydown Works
Consider a buyer obtaining a 30-year fixed-rate mortgage with a 7% note rate.
Under a typical 2-1 buydown arrangement:
- Year 1: The payment is subsidized to an amount equivalent to a 5% interest rate.
- Year 2: The payment is subsidized to an amount equivalent to a 6% interest rate.
- Year 3 and beyond: The buyer makes the full payment associated with the 7% note rate.
A 3-2-1 buydown works similarly, but the subsidy phases out over three years.
These arrangements can provide meaningful short-term payment relief.
However, they also introduce an important financial consideration.
Buyers must be able to afford the full mortgage payment after the temporary subsidy expires.
Someone who purchases a home based primarily on the temporarily reduced payment may experience financial difficulty when that subsidy ends.
Buyers should also be cautious about assuming they’ll simply refinance before the buydown expires.
Future mortgage rates, property values, income, credit qualifications, and refinancing costs are uncertain.
A temporary buydown can be useful when structured appropriately, but it should not be used to make an otherwise unaffordable home appear affordable.
Would a Price Reduction Be Better?
Sometimes, absolutely.
If a home is overpriced relative to comparable properties, its condition, location, or available alternatives, the seller may need to reduce the asking price to attract serious buyers.
Seller incentives aren’t a substitute for realistic pricing.
However, when a property is already competitively priced, sellers should consider whether a concession might have a greater impact on the buyer than an equivalent price reduction.
A $10,000 Example: Price Reduction vs. Seller Concession
Consider a hypothetical home listed for $300,000, with a buyer making a 20% down payment and obtaining a 30-year fixed-rate mortgage at 6.5%.
At the original asking price, the buyer would finance $240,000, resulting in a monthly principal-and-interest payment of approximately $1,517.
Now suppose the seller reduces the price by $10,000 to $290,000.
Assuming the same down-payment percentage and interest rate, the buyer would finance $232,000, reducing the monthly principal-and-interest payment to approximately $1,466.
That’s a savings of approximately $51 per month.
But what if the seller instead kept the $300,000 price and offered $10,000 toward allowable buyer closing costs or a permanent mortgage rate buydown?
The buyer could potentially preserve thousands of dollars in cash at closing or obtain a lower interest rate that produces greater monthly savings.
The actual result would depend on the lender’s discount-point pricing, loan program, and other financing requirements. A $10,000 contribution does not guarantee any particular interest-rate reduction.
This example also assumes the buyer maintains the same down-payment percentage. Different financing arrangements would change the results.
Note: The mortgage payments illustrated above include principal and interest only. They do not include property taxes, homeowners insurance, mortgage insurance, or other expenses that may affect the buyer’s total monthly housing payment.
The point isn’t that seller concessions are always better than price reductions.
It’s that the same $10,000 can affect a transaction in different ways, and sellers should understand those differences before deciding how to use it.
A price reduction can also lower the buyer’s required down payment, reduce the amount financed, and potentially affect other transaction costs. Seller concessions, meanwhile, are subject to lending limits and generally cannot simply be converted into unrestricted cash for the buyer.
The seller’s net proceeds must also be considered.
The goal isn’t to offer the largest incentive. It’s to identify which combination of price and terms creates the greatest value for the likely buyer while protecting the seller’s interests.
Sellers May Be Competing on Monthly Payments, Not Just Asking Prices
This is particularly relevant when resale properties compete with newly constructed homes.
Homebuilders sometimes offer financing incentives, closing-cost contributions, mortgage rate buydowns, or other programs designed to make purchasing their properties more attractive.
A buyer comparing a resale property with new construction may look beyond the advertised sales prices.
They may consider:
- How much cash will I need to close?
- What will my monthly mortgage payment be?
- Are there financing incentives available?
- What repairs or improvements might I need to make after purchasing?
- Which property offers the best overall value?
Individual homeowners may not have the same financing relationships or incentive budgets as large builders.
Nevertheless, understanding how buyers evaluate affordability can help resale sellers develop more competitive strategies.
This doesn’t mean every Greater New Orleans homeowner is competing with new construction. The competitive environment varies considerably by parish, neighborhood, property type, and price range.
The important thing is to understand the actual alternatives available to buyers considering your property.
Choosing the Right Incentive for the Right Buyer
Different buyers have different financial priorities.
A first-time homebuyer may be especially concerned about preserving cash for closing, moving expenses, and future home maintenance.
A buyer with substantial savings may be more interested in reducing the monthly payment through a permanent mortgage rate buydown.
Another buyer may prefer a lower purchase price, particularly if they expect to refinance or sell within a relatively short period.
And some buyers may find that the seller’s proposed incentive doesn’t meaningfully improve their financial situation.
There is no universal solution.
This is why communication between the real estate agents and the buyer’s mortgage lender can be valuable when evaluating offers and negotiating terms.
The lender can calculate the financing options and determine which concessions are permitted under the buyer’s particular loan program.
The real estate agents can then help their clients evaluate the overall transaction, including price, concessions, contingencies, and other contractual terms.
A More Strategic Approach to Selling Your Home
When a property isn’t attracting offers, the solution isn’t always as simple as reducing the price.
Sometimes the asking price is the primary obstacle, and finding the market-clearing price is necessary.
Other times, the property may already be competitively positioned, but buyers are struggling with affordability or the upfront costs of purchasing.
In those circumstances, seller-paid closing costs, mortgage rate buydowns, or other concessions may deserve consideration.
The important question isn’t simply:
“How much should I reduce my asking price?”
A more productive question may be:
“What combination of price and terms will make my property most attractive to qualified buyers while still meeting my financial objectives?”
Answering that question requires an understanding of the local market, competing properties, buyer financing, and the seller’s individual circumstances.
Selling a Home in Greater New Orleans?
At GNO Realty, we believe selling a property involves more than determining an asking price and putting a sign in the yard.
Our approach is to help property owners evaluate their available options, understand the potential financial implications, and develop a strategy that aligns with their goals.
Whether that involves adjusting the asking price, considering buyer incentives, making improvements, or evaluating an entirely different approach to selling, the objective is to make informed decisions based on the property’s circumstances and current market conditions.
If you’re considering selling a home in Greater New Orleans or the surrounding areas, contact GNO Realty to discuss your property, your goals, and the options available to you.
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