The Value of the Buydown

By
Mortgage and Lending 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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Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
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David Love....  if anyone read my first or 2nd comment... everyone is either assuming buydown or buying down the rate. He doesn't clarify it here.

I will agree though, that I did many buydowns from 1994 to 1997 or 1998. The market changes now have been safe enough to do a fixed mortgage because of the low rates.

Nov 27, 2006 04:07 PM #19
Ambassador
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. 4Terra Land Brokers .. 828-776-0779 Asheville NC
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i am not a money geek, but I wouldn't mind being a demi-money geek and to that end,  ALL of your comments help. It's so good to have y'all around. Now, if anyone is interested in
GFCIs, I might be able to say a word or two that could shock ya'.
Nov 27, 2006 04:26 PM #20
Rainmaker
194,823
Leo Namiot
Canopy Mortgage - Jacksonville, FL
Outstanding Service & Great Rates

It seems like this is POINTS to get a discount on the rate life long of the loan.

 There are programs that you can get a buy down for a fixed period of time, for example you can do a 2/1 Buy Down where the rate is reduced the first year by 2% and 1% the second year, many sellers will offer this as a benefit to the buyers paid by the sellers in order to help sell their home. The temp buyer down is really not worth the buyers to pay for since the cost is usually about the sam4e as the savings.

I hope that helps clear this up.

Nov 27, 2006 04:35 PM #21
Rainmaker
659,636
Randy Prothero
eXp Realty - Mililani, HI
Hawaii REALTOR, (808) 384-5645

John, the points are something to consider, but many of my clients will never keep the loan long enough.

Leo suggestion might work in those cases.

Nov 27, 2006 05:13 PM #22
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Jeff Belonger
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But in Leo's suggestion, they usually will be the same amount of points, because you have to buy down the rate also. He tries to clear this up, but you can't assume what John has meant until he speaks himself. There are two different phrases or words mentioned in this blog.

Buydown and buying down rate. And if this was a true buydown, the points would be listed differently. ...worded differently, which are called buydown points. So again, we can't assume and it's not an easy one in regards to this topic. I just wanted to clairfy that. ..and it's my opinion.

Nov 27, 2006 05:46 PM #23
Rainer
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Eddy Martinez
Nationwide Funding Group - Highland Park, CA
there is no way customers would pay 2.5% percent of the loan amount to save $108.00 per month and only .625 off their rate. I can offer a one point buy down with a lower rate 5.5 % you are quoting. The reality is people dont keep their loans long enough they refinance when theres a need. 
Nov 27, 2006 06:49 PM #24
Rainmaker
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Leo Namiot
Canopy Mortgage - Jacksonville, FL
Outstanding Service & Great Rates
Good point Jeff but in many cases when you can only give say 3% sellers concession max. The Temp. Buy Down would work plus the Temp Buy Down will give then buyer a greater monthly savings off the bat for example 3/2/1 would give the buyer a 3% reduction in rate the fist year so on a 6.25% rate that lowers it way down to 3.25% the first year on a $300K loan amount that is $1847.15 vs $1305.62 and IF the buyers are planning to be there short term say 3-4 years or planning a increase in pay for some reason over those next few years this really helps sell the buyers. I recently did a deal where the wife just had a baby and was taking 1 year off of work so they had 1 income for the next year the 3/2/1 buy down was a no brainer. This sealed the deal as the buider sucked up the cost of the buy down rather than lower his price.
Nov 27, 2006 11:39 PM #25
Rainmaker
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Leo Namiot
Canopy Mortgage - Jacksonville, FL
Outstanding Service & Great Rates

Eddy, you are right the numbers have to work in order for someone(buyer) to pay points and lower their rate. If they are saving only $108 a month and paying 2.5% in points then that is not a deal that makes much sense to me. They would be better off paying in an additional $100 a month towards principle to reduce the life of their loan.  We all know that most people keep their loan for about 5-7 years and refinance or sell within that time frame so the 30 year savings usually does not kick in.

Let's not forget the tax deduction for paying points on a purchase, that is a help as well.

Nov 27, 2006 11:43 PM #26
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Jeff Belonger
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Leo.... yes, but do the numbers on a 3/2/1 buydown using your base rate of 6.625% and tell me how many pts that you would have to pay?  lol   Not trying to make a war here, but you would need to start with your base rate in the 7's when doing a 3/2/1. That type of buydown is way to expensive and you would need a lot of YSP to pay for this. Just food for thought. That 3.625% start rate would be very expensive.

And in all honesty, if your client needs a 3.625%  rate to qualify, they shouldn't be buying in todays market, with how housing is so up and down and with fixed rates being so low right now....

And Eddy makes a good point. If I did anything, I would do the 1% buydown. Gets you a great rate at little cost.

By the way, where is John? I hope we didn't scare him away. In either case, some good discussion here.

Nov 28, 2006 12:33 AM #27
Rainmaker
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Derek and Mariana Wagner
The Artisan Group- Keller Williams Premier Realty - Colorado Springs, CO
The Artisan Group - Colorado Springs REALTORS®

(please excuse my lack of mtg knowledge...) I have seen too many homes face pre-foreclosure/ foreclosure becasue their 2/1 buydown (if that is what we are taking about, here...) rates rose faster than the "raises" that the buyers thought they would get.

It only works, here, with new builds & their incentice $$, as I have yet to find a seller that is willing to kick in more than a few thousand dollars toward closing costs...

Nov 28, 2006 12:54 AM #29
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
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Mariana.....  rates have nothing to do with a 2/1 buydown... Once I lock you into that rate, I can tell you exactly what your payment would be for the next two years, no matter what rates do. You might have this program confused with another program. This program is very safe if explained. This is just an FYI for those that might not be sure.

Nov 28, 2006 12:58 AM #30
Rainmaker
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Leo Namiot
Canopy Mortgage - Jacksonville, FL
Outstanding Service & Great Rates

Jeff, I see your point here, I just closed a deal that was a 2/1 buy down, the rate back in OCT was 6.375% Fixed for 30 years, the loan amount was $250K and the buy down was about $5,000 which was great for the buyers who the wife just had a baby and was taking 1 year off from work. Gave them a break for 2 years and the opportunity to sell a new construction home.

I agree that is someone needs a 3.625% rate to qualify they should not be buying the house but in this case it's a matter of short term reduction because of the wife being out of work on leave. This also is great for a spouse who may be in school, I did one for a couple who's husband was in law school and had 1 year left, they were on 1 income and a reduction of $360 a month for the first year sold the house, the loved it and making that payment was tight without the buy down, he graduated and makes more than enough now to cover the mortgage on his own. This is not meant to qualify people for a lower rate but rather help them while making a transition. As for the sellers it's a great incentive.

Nov 28, 2006 01:54 AM #31
Rainmaker
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Suzanne Marriott
Keller Williams Arizona Realty - Anthem, AZ
Associate Broker, CLHMS, e-PRO
Builders in the Phoenix area are getting very creative with their huge incentives - they can't slash the price too much - so they use part of the incentive to buy down for the buyer.
Nov 28, 2006 01:56 AM #32
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Jeff Belonger
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Leo... I know, I also agree that it can help. But like I said,.... you keep talking about a 3/2/1 buydown when you mention rate of 3.625%. Did you look at the cost of that? I could get creative enough to semi do what Eddy mentioned, doing a 1 or 1 1/2 buydown and using that money for the another approach. Meaning.... how much of a down payment were they doing?  If say 10% or 5% down, using that money to buy down their PMI....this would save them even more money. Again, thinking outside the box and attacking this from two sides.
Nov 28, 2006 02:04 AM #33
Rainmaker
194,823
Leo Namiot
Canopy Mortgage - Jacksonville, FL
Outstanding Service & Great Rates

Well Jeff, It works and works well for my customers and with the Fixed rate as of today at 6.25%  a 2/1 buy down cost of about $4000 to the sellers on a $300K purchase and loan amount of $250K which makes a lot of sense to me. That reduces the rate to 4.25% the first year and 5.25% the second year and then they are back to the 6.25% for the balance of the loan. Great marketing tool and great deal for everyone.

http://activerain.com/blogsview/22874/Sellers-Buy-Down-The

Nov 28, 2006 02:28 AM #34
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
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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.

Nov 28, 2006 02:36 AM #35
Rainmaker
431,726
Frances C. Rokicki
Fran Rokicki Realty, LLC - Bolton, CT
Broker-Mentor,CRS

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?

 

Nov 28, 2006 03:01 AM #36
Rainmaker
218,589
William Collins
ERA Queen City Realty - Scotch Plains, NJ
Property and Asset Management

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! 

 

Nov 28, 2006 03:05 PM #37
Rainer
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David McCamment
Tarbell Realtors - Murrieta, CA

John,

 

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

Nov 28, 2006 06:58 PM #38
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
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.
Nov 28, 2006 11:05 PM #39
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