How do you calculate the amount the seller is paying towards a buydown using discount points?

To determine the amount the seller is contributing towards a buydown using discount points, the correct approach involves multiplying the purchase price by the loan-to-value (LTV) ratio and then by the total discount points.

Here's why this calculation is the right method:

Discount points are a form of prepaid interest that a buyer can pay up front to reduce the interest rate on their mortgage. One point is equivalent to 1% of the loan amount. To find out how much the seller is contributing, you first need to establish the loan amount, which is determined by the purchase price multiplied by the LTV ratio.

The LTV ratio reflects the percentage of the property value that is financed through a mortgage. After determining the loan amount, multiplying it by the discount points provides the figure for the seller's contribution towards the buydown. This effectively reduces the buyer's mortgage interest rate over the life of the loan, making it financially beneficial for the buyer.

By using this formula, you are effectively capturing the real financial impact of the buydown strategy on the loan.