A Great And Often Underutilized Way To Sell A Home In A Tough Market

Real Estate Agent with Maximum One Greater Atlanta Realtors

In the tough buyer's markets of today, sellers are often scrambling to find a way to make their property more attractive to prospective buyers than their neighbors home.  One of my favorite ways to accomplish this is by using what is known as a rate buydown.

Many Sellers and even real estate agents don't understand what a rate buydown is.  In a nutshell, it simply works like this.  Instead of simply contributing to the buyer's closing costs, a seller can take those closing costs and use them to prepay a portion of the interest for the first year or so of the loan.  There are 2 common types of rate buydowns:  A 3-2-1 buydown and a 2-1 buydown.  They both work the same way and differ primarily in the number of years that they extend.  Basically, if a seller offers a 2-1 rate buydown, they will be contributing to pay the interest in advance to make the buyer's interest rate 2% less than market rate for the first year and 1% less for the second year.

Now, let's look at the implications of this:  If the market rate is 6%, for the first year the buyer will only have a payment based on a 4% interest rate. On a $200,000 loan amount, the buyer's principle and interest payment would be approximately $1,200/month at the 6% rate.  If their rate was bought down to 4%, they would only pay $954.83 / month for the entire first year, in the second year, their rate would be 5%; so they would pay approximately $1,073 / month.  They would not have to make the full $1,200 /month payment until the 3rd year of living in the house.  Plus, this can be a fixed rate loan - meaning that the rate will NEVER get higher than 6% for the entire 30 year duration of the loan.

This can be incredibly valuable to a buyer with future money (expected raise, promotion, inheritance, annuity, etc.).  Generally, the buyer can qualify at the lower interest rate (though that's getting more restricted these days).  Even still, in the right situation, it can make your home/listing more attractive to buyers who can benefit from such creative financing.  Plus, you can advertise that $200,000 + home with a monthly payment of $954 for the first year.

Some notes:  If you're an agent, be sure to get your advertising of these financing options approved by your broker to make sure you are in compliance with applicable laws and you are not crossing the line by giving financial advice.  Also, check with a lender to make sure these are still possible.  Some lenders have put restrictions on rate buy downs at this point; but I know they can be done since I just closed on a loan with a 3-1 buydown.

Finally, I am not a lender and do not profess to be one; so it is your responsibility to confirm this information with an expert in the financial area.  However, this information is based upon my understanding of how it works.  Perhaps some Active Rain Lenders will like to comment on this and clarify or point out things that I may have missed, etc.

Brian Schulman
Coldwell Banker Residential Brokerage, Lancaster PA - Lancaster, PA
Lancaster County PA RealEstate Expert 717-951-5552

Matthew, I haven't seen buydowns featured since the high interest rate bad old days of the 1980s and early '90s.  Good suggestion.

Jul 09, 2008 01:17 AM