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This Is How Interest Rate Buydowns Benefit Home Sellers
American Pacific Mortgage / December 13, 2022 at 8:00 AM
Seller concessions almost never sound like a very good idea…to the home seller. For the prospective buyer, on the other hand, a little give here and there may be just what they need to close the deal and pay full asking price for your home. One of the most popular seller concessions in any real estate market is an interest rate buydown.
Interest Rate Buydowns
As you might imagine, in a rising-rate market, anything that a buyer can do to reduce the mortgage interest rate is a huge perk to them. On the flip side, anything a seller can do to attain the highest price possible for their home is also worth exploring. Interest rates can be a huge barrier for many buyers, and removing (or reducing) that barrier can bring many buyers back to the negotiating table.
This is where a rate buydown can be beneficial. There are two types of buydowns: One is permanent; the other is temporary. Both will reduce the interest rate of the loan, allowing the borrower to save money on their monthly mortgage payment.
Permanent Mortgage Rate Buydowns
A seller can help a buyer obtain a permanent mortgage rate buydown by paying a fee (mortgage points), which will 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. 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.
Temporary Mortgage Rate Buydowns
There are several types of temporary buydowns, but the 2-1 buydown is the most common.
The 2-1 buydown will reduce the interest rate by 2 percentage points during the first year of the buyer’s loan term, and then reduce it 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.
If you offer a temporary interest rate buydown and the buyer agrees, that money will be debited from your sale proceeds and will be placed into an escrow account. It will supplement the buyer’s monthly payment for the first two years of the loan.
The Benefits to Home Sellers
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 about the art of negotiation, 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.
The Benefits to the Real Estate Market
These seller concessions also have broader implications for the entire real estate market and home values in the neighborhood.
The sales price of the home is what gets recorded with the county records. Real estate agents use this data to form comps—aka comparables—which help them to determine the price of other homes in the area. A reduction in a purchase price reflects poorly on the entire neighborhood, often resulting in lower valuations when the next home hits the market.
Price reductions are also noted on online real estate sites. There, too, they can be perceived as a negative mark on the listing or even the entire area. Paying for a permanent or temporary buydown allows the property to be sold at a higher price than it might have been otherwise. That keeps the area’s real estate values stable and the neighborhood unmarred by reduced-price homes.
Are you ready to explore the strategy of offering an interest rate buydown when selling your home? We are available to help you explore your options, so give us a call today!
Credits to Risse Davis APM
Branch Manager | Mortgage Advisor
Licensed in OR, WA, CA, AZ, MT, KS, FL, ME
NMLS 1057017
c: (503) 891-6386
[email protected]
2737 SE 21st Ave
Portland, OR 97202
