The hot topic in the real estate market is a loan interest rate buydown paid by the seller as a credit in a property purchase.
What it is: Buyers getting a loan can pay a fee (called a “point,” or percentage of the loan amount) to the lender to get a lower interest rate. “Buying down” the interest rate results in a lower monthly mortgage payment. In an effort to entice buyers to purchase a home, a seller can offer to cover that fee. Or buyers can include a term in their contract that asks the seller to pay the fee.
Why we’re talking about it: The SF market is grappling with big market challenges right now. Sellers are clinging to perceived values for their homes, but recent interest rate hikes and stock market losses are continously chipping away at buyers’ purchasing power. Sellers looking to give buyers incentives are getting creative with the financing vs. reducing the list price.
How it works: The buyer confers with his or her lender to figure out the loan type and interest rate available. The lender can then tell the buyer how much one or more points would cost, and how much the points can reduce the monthly payment. Karen McDowell (NMLS ID 454323) at Bank of the West gave this sample scenario: You have a 30-year fixed loan for $1M on a $1.5M purchase price. The rate today would be 5.75%, but two points–or $20,000–would knock that rate down to 5.25% (a ~$310/month payment change). Most lenders have a limit to the amount of money a seller can credit the buyer, such as 3% – 6% of the purchase price or a credit not to exceed the total amount of the buyer’s closing costs. Most of the lenders to whom I talked said they’re generally seeing buydown credits in the $20,000-$25,000 range.
There are also temporary loan rate buydowns: For adjustable-rate mortgages, lenders have “2-1” buydown programs. Primary Residential Mortgage’s Mike Koran (NMLS ID: 87656) offers this program, and the effective rate is two percent lower in the first year and one percent lower in the second year of the loan. In the third and remaining years, the full note rate will apply. The borrower must qualify for the full monthly payment (before the buydown rate is applied). The credit is deposited as a lump sum into a buydown account, and a portion of this sum is released each month to reduce the borrower’s monthly payment. (Mike says that the servicer administers this account.) This program has a conforming loan limit of $970,800, and is only good for conventional primary and secondary home purchases.
Pro Tip: Get approval for a buydown credit up front. This isn’t an arrangement that the buyer and seller can structure without lender participation and approval.