I Hate Rate Buydowns (Unless Sellers Pay For Them)
A “rate buydown” gives borrowers lower interest rates in exchange for higher fees or “discount points” paid up front (when they close).
One point or 1% of the loan amount typically buys a rate down by about 1/4%.
We discourage rate buydowns in general because borrowers rarely hold onto their mortgages long enough to make the extra points or fees worth the added expense.
This is especially the case now because we think falling rates and no-cost refi opportunities are so likely over the next 12 months.
But – if sellers are willing to pay for the rate buydowns, my opinion changes quickly.
Agents, Sellers, And Buyers Win With Rate Buydowns
Seller-paid rate buydowns are an excellent tool that provides a “win-win-win” for agents to move high-end listings, for sellers to secure offers, and for buyers to save money over the long run.
Agents and buyers may want to consider seller-paid rate buydowns instead of price reductions because:
- It saves the seller money
- It saves the buyer money over the long run with lower payments
- It helps to hold home values for the area
- It avoids the “stigma” of price reductions; and
- Offering a far-below-market-interest rate with the property is a strong enticement for prospective buyers to get in the market
Example: $1,333,333 List Price; $1,000,000 Mortgage
Let’s assume we have a $1 million loan and a listing price of $1,333,333 (amounts we see in both Texas and California; numbers are rounded for simplicity).
If the listing gets stale, rather than reducing the price by $50,000, the seller could instead offer to buy the rate down from 4.875% to 4.25%, at a cost of $30,000 (paid by the seller).
This reduces the buyer’s mortgage payment from $5,292 to $4,919, a savings of $373 per month or almost $4,500 per year!
And – it saves the seller $20,000 because a $30,000 buydown is obviously less than a $50,000 price reduction.
Here Is Where This Gets Interesting
The buyer’s payment would be $175 higher if the seller reduced the price by $50,000 – but did NOT offer a rate-buydown.
If the price was $1,283,333 ($50,000 less) and the loan amount was $962,500 (approximately 75% loan-to-value still), the mortgage payment with a 4.875% rate (and no rate buydown) would be approximately $5,094.
Again, this is $175 HIGHER than the payment the buyer would have with the higher price and a $30,000 buydown.
We encourage interested listing agents and sellers to contact us for additional details.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
