What is the cost to the seller for a level payment temporary buy-down that reduces the buyer's interest rate by 2% for 3 years, lowering the monthly payment from $1000 to $875?

In a level payment temporary buy-down, the seller pays an upfront cost to reduce the buyer’s interest rate for a fixed period, in this case, 3 years. The key to calculating the seller's cost is to determine the total amount the seller must cover to keep the buyer’s monthly payment at the reduced level during the buy-down period.

Here, the monthly payment is reduced from $1000 to $875, which represents a savings of $125 per month for the buyer. Over the course of 3 years, or 36 months, this equates to a total savings of 36 months multiplied by $125, resulting in $4500.

Thus, the cost to the seller for the level payment temporary buy-down that achieves this reduction in monthly payments is $4500. This amount reflects the total subsidy the seller provides to assist the buyer in managing the initial years of the mortgage at a lower interest rate, effectively making the home more affordable during that period.

This calculation clearly shows how temporary buy-downs work, and understanding this mechanism is crucial in evaluating seller concessions in real estate transactions.