A seller interest rate buydown can help move some of the more than 550 condos sitting on the market.
What’s this about? I covered rate buydowns back in 2022, when interest rates started to climb. I think buydowns are a good negotiating tool for properties that have been sitting on the market. The buydown can reduce the buyer’s monthly payment for the first year or two of home ownership.
How can sellers motivate buyers to take action? One option for sellers is to offer what’s called a 2/1 buydown to temporarily lower rates for the first two years of the buyer’s ownership. (Rates for a 30-year fixed mortgage are in the mid- to high 6% range at the moment.) The seller agrees to pay the cost of the rate buydown by two percent the first year and one percent the second year. This non-recurring closing cost is paid in escrow out of the seller’s proceeds from the sale.
What price point is ideal for the buydown? Condos in the lower to mid-range price point are good candidates for this strategy. There are currently 355 condos listed for up to $1.2M in San Francisco, with an average days on market of 86.
How would this work? Let’s say you have a condo listed for $1.2M and a buyer comes in at the asking price with 20% down. We’ll use an interest rate of 6.875% on the $960,000 loan, which would translate to a $6,306 monthly payment. The 2/1 temporary buydown would drop that payment to $5,080 (at what’s effectively a 4.88% rate) for the first year, saving the buyer $1,226/month. The savings during the second year would be $628 per month. The cost to the seller in this scenario would be approximately $22,246.56. (Costs vary depending on loan amount and interest rate. Confer with your lender prior to writing your offer so you can be specific about the seller credit amount in your contract).
Another option is a permanent buydown. The seller would pay $20,352 to permanently buy down the rate to 6.375%. The monthly payment on 6.375% is $5,989. It is a $318/month savings and $3,816/year savings.
The upshot: The rate buydown is a great tool to get closer to the price you want while giving the buyer some mortgage relief. There’s also the possibility that rates could be lower after those initial two years, at which time the buyer could refinance to avoid the jump in monthly payments in the third year and beyond.
[Thanks to Rachel Bernstein [NMLS: 306889], VP of Mortgage Lending at Rate for the information provided in this post.]