When interest rates rise, as they are now, neither buyer nor seller wins. Rising interest rates could be disastrous for real estate homebuyers who were initially close to qualifying for a mortgage and prevent them from obtaining the necessary financing causing both sides of the transaction to suffer. Far too many real estate agents are unaware of the rate buydown strategy that could salvage the sale.
Mortgage News Daily reported that mortgage loan applications have recently fallen to their lowest level in 22 years.
Even though we are technically still in a "seller's market," there is more demand for homes than there is available inventory. But the tide is turning do in large measure to the quickly dwindling number of the homebuyers.
Logically, if fewer buyers are able to obtain mortgage financing, there will be fewer home sales. In order to attract qualified buyers, this may necessitate lowering the home's price for those in a hurry to sell.
As a seller's concession, lenders will permit a home seller to "credit" a buyer with a portion of their proceeds. Seller concessions can also be utilized to pay a purchaser's end costs just (closing costs, etc), but cannot be used to assist with the initial installment.
Seller concessions can also be used to pay mortgage points and buy down the interest rate, as experienced mortgage and real estate professionals know.
The goal of the seller-paid rate buy-down is to get the save the deal by permanently lowering the buyer's interest rate. The majority of mortgage agents and professionals will use the seller funds for underwriting costs, escrow fees, and loan fees; however, very few of them consider permanently lowering the loan's interest rate, which significantly lowers the buyer's monthly mortgage payment going forward.
A rate buy-down has much greater impact than lowering sale price as seen in the chart by Neo Home Loans.
Why Price Reduction Isn't Always The Best Choice
What if the buyer has to keep his/her mortgage payments below $3000/mo? As you can see in the chart above, even lowering the purchase price by $20,000 isn't enough. The buyer would not be able to afford the home and follow through on the purchase.
To take things one step further, the final column displays the amount that the seller would actually need to reduce the price of the house in order to achieve the same monthly payment as the rate buydown strategy: $27,270, or nearly three times as much!
The Buydown Strategy
Now consider what would occur if the seller paid two points to purchase a.5% interest rate reduction.
In comparison to the price reduction strategy, this option would not only bring the monthly payment down to a level that the buyer could qualify for, but it would also boost the seller's net profit by $10,500.
Using a seller's concession towards .05% of the buyer interest rate, a much less expensive option for the seller, will drop the buyer's monthly rate well below the $3,000 cap.
Lastly, by decreasing the financing cost, the purchaser will acknowledge more reserve funds over the existence of their advance - not simply forthright.
In A Nutshell
Every real estate transaction involves price and seller concessions negotiations. Many people are unaware that a seller-paid rate buydown strategy has more long-term advantages for all parties involved:
Draws more buyers to the property.
- This saves the seller money up front by not having to lower price.
- Saves the buyer money in the long run because they will have lower payments and a lower interest rate.
- Makes you, the real estate agent, look like the hero.
- It also helps keep home values in the area stable.
Your Two Cents
Have you used the rate buydown strategy before? Please share your experiences with us all. Also, share our articles with your co-workers too!