You may have heard of a term recently many mortgage lenders are promoting called an Interest Rate Buydown or sometimes referred to simply as a Buydown. You also may have wondered what is a Buydown and why do I care?
Are you are a listing agent that is not thrilled with the thought of asking your seller for a price reduction to attract more buyers? Well I believe Buydowns may offer you and your seller better choices. This way, instead of a price reduction being the only tool in your tool belt, you can add the powerful tools of Interest Rate Buydowns to your tool belt.
These Buydowns in your tool belt can be either Permanent or Temporary. I will explain more about Temporary Buydowns in another blog. Today I am providing an example below of the Permanent Buydown. Once understood, these under utilized tools will give a home seller a more than just a single option of a price reduction and in the thank you for bringing them to their attention.
The option I am highlighting today is the Permanent Buydown. This strategy entails having your seller provide potential buyers a credit towards their closing cost on a new mortgage. More specifically, have that credit go towards the buyers discount points to buydown the note rate charged on a new mortgage. This reduction in a buyer's interest rate would be for the full 30 years of the loan and that is why this type of buydown is called a Permanent Buydown of the interest rate.
In this example we are making the assumption that a 3% seller contribution to the buyers closing costs are allocated to discount points. In using a rough estimate of market rates from last week we will assume that the permanent rate on this mortgage is 6% for 30 years. If instead the buyer didn't get a 3% credit towards these points he would be getting a market rate of 7.125% for 30 years.
The second column in the example below shows that If the seller opted for a 3% price reduction instead the price reduction alone does not reduce the monthly payment of the buyer nearly as much. The lower monthly payment is what allow more buyers to qualify for a higher loan. This naturally grows the size of the potential buyer pool.
Here is my example of how a Permanent Buydown would be structured below:
In this example the seller of a property can use a 3% seller contribution to have the buyer Buydown their overall note rate for their 30 year fixed rate mortgage.
So it is clear that reducing the price does not increase the size of the pool of qualified buyers nearly as much as a contribution of closing costs for the buyer if they buy down their rate on their mortgage. The example shows that the mortgage payment only drops about $93 per month with the price reduction vs $343 versus using the Permanent Interest Rate Buydown. The seller would need to drop the price $63,770 to give a buyer that low of a mortgage payment. For a 3% contribution ($17,300) the potential buyer pool expands. I hope this is helpful and provides a better understanding of the question of why you should care.
Below is a link to my full report. For a personalized Seller Buydown analysis of your listing please reach out to me via my contact information below:
Regards,
Mike Cantwell
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