When trying to sell a home in a slow market, you have some incentives to offer buyers to encourage them to act now instead of waiting forever for the market to turn against them. These include paying closing costs, HOA dues, offering a broker selling bonus, simply lowering the asking price, or buying down the mortgage rate. They all cost the seller money.
Of all these options, in my opinion the one that helps both seller and buyer the most is a mortgage buy-down. The common term used by lenders is “points”, and in many cases the borrower doesn’t understand how they actually work. When this happens, the difference between the "real" note rate and the lowered interest rate is paid in cash by the seller or the buyer, but for our purposes we’ll say the seller pays as an incentive to buy his home. Think of it like a subsidy from the seller to the buyer. It increases the buyer's ability to qualify for a loan, therefore, allowing the home to be sold quicker. Plus, a buy-down offer is usually less than a price reduction on the home. Although the actual sales price is unchanged, the amount used to calculate the loan is reduced by the amount of the “buy-down”, which effectively lowers the interest rate.
There are permanent buy-downs that apply to the life of the loan. However, the most common type of buy-down is for the first few years of the mortgage. The most common temporary buy-down is called “3-2-1”, meaning the mortgage payment in years one, two and three is calculated at rates 3 percent, 2 percent and 1 percent, respectively, below the rate on the loan. On a “2-1” buy-down, the payment in years one and two is calculated at rates 2 percent and 1 percent below the loan rate. And on a “1-0” buy-down, the payment in year one is calculated at 1 percent below the loan rate. If you can negotiate a permanent buy-down, you may want to consider how long you actually plan to stay in the home to see if it is really for you.
In addition, the seller can deduct the buy down credit as a selling cost expense, and the buyer receives a 1098 form from the lender and a tax deduction for the buy down credit. The discounted mortgage interest rate helps to ensure the buyer will qualify for the loan. For those who are interested in investment property, the lower monthly loan payment increases the potential for positive rental cash flow.
This can be a difficult subject for some people to understand, so I would suggest if you are interested in pursuing a buy-down, check with your mortgage professional to get more details on the program and find out which type is better for you. Buyers can also pay “points”, and they can also be used by the lender to reduce risk. If you know a little about finance, a simple calculator is available to figure the costs and gains of buy-downs at http://www.thinkglink.com/tools/buydown-calculator/ .
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