Buyer Buy-Down

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A few posts ago, I wrote about Seller Rate Buy-Downs…many sellers are offering to “buy down” the interest rate that the buyer will pay on the loan.  Many lenders are approaching Realtors with this idea:  “preserve the purchase price, just buy-down the buyer’s rate!”  The theory behind this approach is that the buyer says, “I can only qualify for a $700,000 purchase price, therefore I can only offer you $700,000 for your home which is listed at $750,000.”  The crafty seller’s agent then says “Oh well then how about we just buy down your rate so that your payments would be the same as if the property were only $700,000 – or less?”

What happens then is that the seller credits the buyer, say, $10,000 – and buys-down the buyer’s interest rate from, say, 6.825 to 6.375, which means the buyer gets lower payments.  Very clever – well, not really.  The clever thing for a buyer to do in this market is to say to the seller, “I will offer you $700,000 for your home which you are asking $750,000 for – and oh, I want you to cover $10,000 in my closing costs.”  The seller then effectively sells for $690K.  The buyer uses this $10,000 to buy-down his own rate – a half point, a full point, etc – while at the same time ending up with a mortgage amount that is $50,000 less.  And remember:  this $50,000 is the buyer’s profit when he goes to sell.

Why am I blathering on about this?  I think that as a seller’s negotiating tactic, it is a poor one.  However, I do believe that as a buyer’s financing mechanism, it is a good one.  It is my job, as someone’s Realtor, to negotiate the very best price for my buyer clients when purchasing a property.  I will try to get that $750,000 property for only $700,000 – but if at the same time you can secure an additional $10,000 credit fromthe seller and use that to buy your own interest rate down – why not?  With rising interest rates, it may make sense for some buyers (depending on how long they intend to keep the loan, etc.) to buy down their rate.  For example:  a $500,000 loan at 7.00% interest, ammortized over 30 years, will cost $3,327 per month.  The buyer, however, could pay discount points to lower the interest rate down to, say, 6% – and this brings down the payment on this $500,000 loan to $2,998 – a savings of $329 per month.

Doesn’t seem like a lot of money to you?  Well, if you do hold the loan for 30 years, that’s a savings of $118,440.  However, very few people hold their loans anywhere near 30 years.  If you plan to hold the loan for, say, 5 years, that’s $19,740 in savings.  If it costs you $10,000 to buy down your loan that amount, is it worth it to you?  Well, maybe – but if you can get that $10,000 from the seller, is it THEN worth it to you?  Again, it depends:  maybe you would rather use that $10K to buy a new roof that the house needs, etc.

Either way, negotiate as hard as you can to get the best price possible.  Get a credit from the seller, and use it as you see fit.

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