When in the car business, I was forced to do this same calculation again and again: Would it be better for my client to take the $3000 rebate? Or take the 3% interest rate (offered via the manufacturers lender)? You can't have both, because this benefit is nothing more than a SELLER CREDIT.
Real estate buyers can take advantage of seller credits in this same way. When an offer is made on a property, you can negotiate a seller credit and use it to pay closing costs OR TO BUY DOWN THE RATE. Even better, get a seller credit that will pay all the closing costs AND provide a much lower rate on your client's loan.
Believe me when I say, the buyer does not need to understand how it works. But when you tell him he will not need to come up with the cash for closing AND his rate can be dropped by half a point, he will pay attention.
I always encourage my Realtor partners to consider asking for a SELLER CREDIT when making an offer instead of lowering the price. Because most lenders allow seller credits that will far exceed the actual closing costs, a creative Realtor can not only have all non recurring closing costs paid by the seller, but should have plenty of money left over from that credit to "buy down" the rate. (Some lenders will also allow seller credits to cover recurring closing costs as well.)
Most lenders will allow a 3% of purchase price seller credit for closing costs. This credit CANNOT COME BACK TO YOUR BUYER in the form of cash, or be used for repairs to the property. But it can cover points used to buy down the rate. These points will appear on the closing statement separately from any points the mortgage broker is charging.
When to consider a rate buy down
- To bring the rate on a jumbo loan down to earth
- To encourage fence sitters who are waiting for rates to go "even lower"
- When seller's mindset needs a certain sale price, (a credit to the buyer with a higher sales price sounds better to seller than offering $20,000 less on price)
- Instead of lowering the price on a listing that will not sell, you provide a seller credit for rate buy down, and advertise the below market rate as "special financing"
- When the lower rate means the difference between qualifying and not qualifying.
- When you have a buyer who is focused mainly on interest rate
Remember these points (no pun intended)
- You can buy down the rate on both a first and a second loan.
- The house needs to appraise! Do not raise price to cover a seller credit!
- Buy down need not be a seller credit. If buyer would like to pay for a buy down with his own cash, he may do so
- Calculate and discuss with your mortgage partner PRIOR to making the offer. Rate will change if seller credit is negotiated lower, and you will need your mortgage broker to provide new information as to how the rate/payment to the buyer is impacted.
Does this work? In the car business it works so well that rebates and below interest financing are now a standard part of their marketing!
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