The Permanent Rate Buydown
Let’s say you have a home to sell and the asking price is $800,000, and you’ve already reduced it once to get to this point. You’re still not getting good offers.
Do you reduce the price another $20,000? $30,000?
Perhaps a better option might be to pay points to reduce the rate on the buyer’s mortgage, retaining the same sale price and loan amount.
If the interest rate on the $640,000 30-year fixed-rate loan were reduced from 7.25% to 6.375%, the payment would go from $4,365.93 to $3,992.77, a savings of $373.16 per month. The cost to the seller would be about 2 points, or $12,800. Much nicer on the seller than another price reduction, yet producing a significant benefit to the buyer, perhaps just the motivation enough to go to contract.
The Temporary Buydown
Points paid to reduce the rate are sometimes termed a “permanent buydown” because the lower rate and payment run for the entire life of the loan. An even more powerful way to lower the payment is for the seller to buy down the payment in the early years of the mortgage. This is called a “temporary buydown” because the payment reduction doesn’t last.
On a 2-1 buydown, the mortgage payment in years one and two are calculated at rates 2% and 1%, respectively, below the rate on the loan.
Using the same mortgage as before, the payment in year one is calculated at 5.25%, which is 2% below the 7.25% rate paid the lender. The payment in year one is reduced by $832 each month compared to the going rate of 72.25%. In year 2, the payment is reduced by $425. In year 3, it is back to what it would have been without the buydown, the rate of 7.25% and the resulting monthly payment of $4,366.
The total cost to the seller is $15,086, which is still a lot less than a typical $20,000 price reduction but can be just the attention-getter with its tangible result enough to encourage the buyer that they can afford to live happily ever after, after all.
Please be advised that the rate buydown strategy can’t be deployed on every loan type (conventional loans only) and applicants must qualify within standard mortgage underwriting guidelines. Please feel free to contact me any time for a consultation to determine qualification.
John O’Connor, NMLS 595659; Prosperity Home Mortgage, a wholly owned subsidiary of Berkshire Hathaway Home Services, Inc.
