What Are Interest Rate Buydowns? Why They’re Popular in Home Sales Right Now

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  • In an interest rate buydown, the seller pays mortgage points on the buyer’s mortgage, lowering the interest rate.
  • Permanent buydowns are more beneficial than price reductions for the buyer and the seller.
  • Also called seller buydowns, they’re better for buyers who plan on living in the same house for a long time.

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Higher mortgage rates and prices can prohibit many buyers from getting a mortgage on a new home. This causes many potential buyers to wait on purchasing. When there aren’t enough interested buyers, some sellers may turn to different approaches to make their home sale happen.

This is where the interest rate buydown — also called a seller buydown — comes into play.

What is an interest rate buydown?

An interest rate buydown is where the seller agrees to pay mortgage points on the buyer’s mortgage, buying down the interest rate. Sellers may also offer a temporary buydown to lower payments over the first two or three years.

Permanent buydowns are typically done by buyers, agreeing to pay their mortgage lender money upfront in exchange for a lower rate. This practice is often referred to as buying mortgage points. Each point costs 1% of the loan and usually lowers the interest rate by 0.25%.

How do interest rate buydowns work?

Interest rate buydowns are a tool for sellers to use to secure a buyer. In lieu of taking a lower offer or making other concessions, a seller can offer an interest rate buydown. This will lower the buyer’s monthly mortgage payment — temporarily or permanently.

When done right, permanent seller buydowns can work better than price cuts for both the buyer and the seller. That’s because interest compounds over time. If the buyer plans on living in the property for the life of the loan, they can save thousands with a buydown over a price drop.

With temporary buydowns, sellers can lure in buyers who may be intimidated by a new mortgage payment. These types of buydowns offer decreases in the interest rate for the first two or three years, lowering the monthly mortgage payment and allowing buyers to ease into the payment. This is a good option for buyers who believe they’ll have better financial footing in a couple of years’ time.

What is an example of an interest rate buydown?

Here’s an example of what a permanent interest rate buydown looks like: A seller lists their home at $400,000. After some time, they get an offer of $380,000. Instead of taking the offer, the seller decides to counteroffer with a buydown. In this case, the seller offers to pay $8,000 for two mortgage points, which reduces the buyer’s interest rate by 0.5%.

Below is a table comparing the price reduction to the seller buydown, calculated with an online calculator. The buyer has a 30-year fixed-rate mortgage with an interest rate of 6.7%. Keep in mind that the monthly payment only accounts for principal and interest, not taxes, insurance or other fees.

As you can see, while the interest reate buydown would mean the buyer needs to put down $1,000 more, it would save them nearly $20,000 over the life of the loan. This option is a win for the seller too, only having to concede $8,000 instead of $20,000.

Why would a seller do a 2-1 buydown?

A 2-1 buydown is a temporary buydown that lowers interest in the first two years of the mortgage. Often sellers will use this tactic if they’re having a hard time selling their home, to encourage buyers to make an offer.

With a seller-paid 2-1 buydown, the buyer’s first year of interest on mortgage payments is reduced by 2%. In the second year, the interest rate is reduced by 1%. The payment for the buydown come out of the home sale proceeds. A 2-1 buydown can be a great opportunity for a buyer and can be just what the seller needs to sell the house.

Buyers: Is buying down your rate worth it?

If you’re buying a home and the seller proposes a buydown, buying down your interest rate means paying more costs upfront for savings down the road. If you’re able to do it, you can save significantly in the long term. However, you must stay in your house for a significant amount of time to make it worth it. If you’re buying a home with a plan to sell and upgrade in five years, buying mortgage points may not make sense.

Andrew Dehan

Andrew Dehan

Originally Appeared Here

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