You’ve heard it time and again: rising interest rates are going to cause housing price growth to stall, or even worse, retreat. You may have seen the blizzard of price changes on the MLS, with prices dropping all the time. Earlier today I was talking with a mortgage broker friend of mine, Hal Webb with First Horizon Home Loans. He gave me a great pearl of wisdom about seller rate buy-downs.
Let’s take the hypothetical situation of a seller, with a home listed at $850,000. A buyer comes with an offer of $775,000. The buyer is low-balling the seller because $775,000 is all he can afford to pay – the difference between the two payments is, say, $500 per month. In this situation, the seller can offer to buy down the buyer’s rate. For example, the seller could offer to pay the buyer’s lender a couple of points: 2% of $850,000 is $17,000. Doing so would lower the buyer’s interest rate a full percentage point or more, for the life of the loan. The lower interest rate would mean lower payments – enabling the buyer to afford a higher purchase price.
I have been seeing a few comments in the MLS lately where the seller is offering to buy down the buyer’s rate. This is a good strategy on the seller’s part. However, the buyer needs to know what really is happening. The seller will pay $17,000 to the buyer’s lender so the buyer gets a lower rate and lower payments – but the buyer still ends up with an $850,000 loan. A savvy buyer might just ask the seller for a $20,000 credit to help closing costs – yet also with a lower purchase price of $825,000. The buyer could then use $10,000 to pay the non-recurring closing costs (keeping more cash in his pocket after closing), and use $10,000 to buy down his own rate. This leaves him with more cash at closing, lower payments, and a loan amount that’s still $25,000 less than $850,000. And that’s $25,000 more in his pocket when he goes to sell.
It’s a great idea for sellers to offer to buy down the buyer’s rate – sellers need all the marketing ideas they can get these days. But the informed buyer knows what’s really going on here, and will choose the best mix of financing terms and contract price work best for him.