The lowdown on the buydown

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Published Date 5/29/2024

Builders do it as an incentive to sell new construction, so why not the sellers of resale homes?

In a market where interest rates make your head spin when juxtaposed against the high price of a house, anything that can be done to reduce the mortgage interest rate is a huge perk to a buyer. Of course, anything a seller can do to attain the highest price possible for their home is also worth exploring. How does this work?

Because interest rates can be a huge barrier for many buyers, a rate buydown can make things happen. There are two types of buydowns, permanent and temporary, but either will reduce the interest rate of the loan, allowing the borrower to save money on their monthly mortgage payment.

What can sellers do? They can help a buyer obtain a permanent mortgage rate buydown by paying a fee (mortgage points), to lower their interest rate for the life of the loan. A permanent rate buydown is a good strategy for buyers who plan to stay in their new homes long term.

“You can purchase as little as 0.125 of a mortgage discount point or as much as 4 mortgage points; the limit varies by the type of loan,” says a rep from American Pacific Mortgage. “Home sellers should keep in mind that each point is equal to 1% of the buyer’s home loan amount. For example, with a $500,000 mortgage loan, 1 point will be $5,000.”

If you’re not a cash buyer and don’t think a buydown is more advantageous than a price reduction, let this sink in: If you ask the seller to reduce the price of a $300k home by $10k, you’ll save about $78 a month. But if you ask for a $10k credit in escrow to buy down your interest rate, you’ll save $248 per month.

Temporary buydowns usually come in the form of what is called the “2-1.” This type of arrangement reduces the interest rate by 2 percentage points during the first year of the buyer’s loan term, and then by 1 percentage point the second year. After the first two years, the interest rate returns to the regular note rate for the remaining life of the loan, and the buyer will be responsible for the full monthly payment. Buyers see it as a “leg up” when they have hole-in-the-pecket syndrome during the first few years of owning a home.

If you’re a buyer looking for a temporary interest rate buydown, you ask that money will be debited from your sale proceeds to be placed into an escrow account, supplementing your monthly payment for the first two years of the loan.

Now that you know more about these types of seller concessions, you may be wondering why a seller would offer them. The answer is simple: to achieve the full asking price on their home for sale.

Think about it this way: An interest rate buydown allows the buyer to save money on their monthly mortgage payments, either temporarily or permanently, for the life of the loan. The temporary savings can be significant when the interest rate is lowered by 1 or 2 percentage points, but the savings over time on a 30-year, fixed-rate mortgage loan can be even greater.

These savings will typically cost the seller several thousand dollars out of their proceeds. But in return for these short- and long-term savings, many buyers will agree to pay the full listing price on the home, making this concession a win-win for both parties. It’s all negotiable, after all.

Achieving the full listing price means more than simply bragging rights. Paying a slight fee for an interest rate buydown is often significantly less than accepting a reduced offer that could equate to more than what the cost of the concession would be.

Seller concessions have broader implications for the entire real estate market and home values in the neighborhood. When the sales price of a home gets recorded with the county records, agents use it as a comparable piece of data, helping them to determine the price of other homes in the area. It follows that a reduction in the purchase price reflects poorly on the entire neighborhood, often resulting in lower valuations when the next home hits the market.

Buydowns, on the other hand, don’t reduce the recorded value of the home. So paying for a permanent or temporary buydown allows the property to be sold at a higher price than it might have been otherwise.

APM,TBWS

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