# The Value of the Buydown

By
Real Estate Mortgage Broker with M & T Bank

We talked previously about using a seller concession to pay for closing costs. It is a great way to save money or to find money to complete a transaction. There is another thing you can use this concession for. You can buy down the interest rate.

How does this work? Remember in the earlier post on seller concession we talked about the different amounts available based on your down payment? These same funds can be used to pay points that will reduce your interest rate.

In that example we showed that on a \$300,000 purchase with a 10% (\$30,000) down payment we qualified for an \$18,000 seller concession. We had \$11,000 in closing costs and escrows. There is \$7,000 available for us to use. We could use this \$7,000 to buy discount points and buy down the interest rate.

Since we will be borrowing \$270,000 each point will cost us \$2,700. Take \$7,000 and divide it by \$2,700 and you get 2.5 points. In a conforming loan this will usually buy down the rate by .625% to .75%. Let's compare.

Points                                            0 Points                             2.5 Points
Interest Rate                                  6.25% (6.389% APR)           5.625% (6.42% APR)
Loan Amount                                  \$270,000                           \$270,000
Monthly Payment (P&I)                    \$1,662.44                          \$1,554.27
Interest Cost over Loan Life             \$328,477.12                      \$289,538.03

There are some real benefits here. Look at the difference. You will reduce your monthly payment by \$108.17. This would save you\$1,298.04 per year and \$38,941.20 over the life of the loan. Not bad, but there's more. Since you are reducing your interest rate you will be paying less interest over the life of the loan. If you take the loan to term you will save another \$38,939.09. In total you would have saved \$77,880.29. You know what is even better...you did it with the sellers money.

These opportunities exist in many transactions, but not all of them. You need to discuss these options with your loan officer and your real estate agent. The best way to be prepared for these opportunities is to make sure you are pre-qualified and are ready to move on the property.

Please let me know if you have any questions. You can email your questions to me at KlassenMortgage@hvc.rr.com. I'll be happy to answer them.

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738,234
Jeff Belonger
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Social Media - Infinity Home Mortgage Company, Inc

Leo....  not a 2/1 buydown... sorry, not trying to make an arguement here.... but you said at one time... 3/2/1 buydown and a rate of 3.625%. My whole point to this was that look at the pricing, this would be way to expensive and you could use that money to possibly buy down the PMI, depending on the down payment, which would be a much great savings than a 2/1 buydown or even a 3/2/1 buydown. I know how a biuydown works, but now you have avoided my question twice... you were the one that mentioned 3/2/1 and a rate of 3.625% and I asked you to look at this.

I am not denying that a buydown can work... but in today's market, with rates being low enough, the possibility of refinancing and so many other factors that aren't mentioned here, it's my opinion that you can say this is a great program now. To many unknowns and I feel that we could be misleading the general public in this post...without examples.

November 28, 2006 10:36 am
Rainmaker
420,055
Frances C. Rokicki
Broker-Mentor,CRS
Fran Rokicki Realty, LLC

Leo & John,

You both have explained the buy down option very well.  It is a great marketing tool to use in this market.  I used it back in the day (80's & 90's) and I am using it now. Instead of dropping the price of the home, the Seller is able to offer the Buyer a savings, whether it is 1 year or 5 years.  It could be a tax deduction (check with your accountant) to be sure.  Incentives are always a nice part of the sale.  Everyone walks away happy and isn't that what we really want to have happen with all of our transactions?

November 28, 2006 11:01 am
Rainmaker
197,569
William Collins
Vice President
ERA Queen City Realty

John, great suggestion. This product was used in more transactions back in the 1980s. However, with prices being the way they are (even with a softening market) and rising real estate taxes, buying down the interset rate can make a significant impact on the monthly payment.

This is a great link for my first post. Thanks!

November 28, 2006 11:22 pm
Rainer
1,510
David McCamment
Tarbell Realtors

John,

That was some very good information and I can see the advantages. I think I will be talking to my lenders.

November 29, 2006 02:58 am
738,234
Jeff Belonger
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Social Media - Infinity Home Mortgage Company, Inc
Yes, John actually points out some good info about buying down a rate. I went the next step further in talking about a buydown, as Leo mentioned. For anyone interested, I wrote a blog yesterday, "buying down a rate vs the buydown" It shows you the difference between the two.
November 29, 2006 07:05 am
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Rainer
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## John Klassen

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