One of the main reasons I hear people are not buying right now is due to high mortgage interest rates. Sure, the holidays, winter weather, and inflated list prices may also be a deterrent, but no one wants to pay more per month with interest rates now close to 7.5%.
Luckily, there is a way to curb these higher monthly payments. It’s called a buydown program and I’ve seen multiple lenders offering it. You may also see it called a 2/1 buydown, 1/0 buydown, or temporary buydown. I’ve seen the numbers hyphenated (2-1 and 1-0) or listed as above. Essentially, the program is an opportunity for the seller (or builder) to pay concessions at closing to reduce the buyers monthly payment for the first year or 2 years, depending on the program. This can help with the affordability of the higher monthly mortgage payment for a temporary period. Really what the seller (or builder) is doing is paying that 1% or 2% difference in the mortgage payment at closing, rather than the buyer paying it per month over those 1 or 2 years. The interest rate on the actual mortgage does not change.
The 2/1 buydown program reduces your monthly payment by 2% interest the first year after purchase, and 1% the second year after purchase. The 1/0 buydown program reduces the monthly payment interest rate by 1% in the first year after purchase. All years after (through year 30) are the non-reduced interest rate monthly payment.
HERE ARE THE NUMBERS:
Let’s say you are offering to purchase a home that’s listed for $300k and you’re putting 10% down. This would give you a loan amount of $270k. At 7.5% interest the monthly payment would be $1,888 (rounding to whole numbers). If you request a 2/1 buydown be paid by the seller, the monthly payment the first year would be $1,533 (5.5% interest rate) and the second year would be $1,707 (6.5% interest rate). The difference between the 7.5% interest rate monthly payment and the 5.5% interest rate monthly payment is $355 ($1,888 - $1,533). The difference between the 7.5% interest rate monthly payment and the 6.5% interest rate monthly payment is $181 ($1,888 - $1,707). This translates to ($355 x 12) + ($181 x 12) = $6434, which is what the seller would pay in concessions at closing for the buydown program.
WHY WOULD A BUYER ASK FOR A BUYDOWN?
There a few reasons:
1. If you’re looking to save more per month for a temporary period,
2. Unable to negotiate a lower purchase price,
3. Or you’re planning to refinance after 1-2 years.
It could be a combination of all of these reasons. Using a buydown program makes buying a home now at a higher interest rate more affordable in the short term (if you consider the next 1-2 years short term). You’re able to see savings in your monthly payment immediately even if you’re unable to negotiate a lower purchase price. Also, if you believe mortgage interest rates will decrease or your household income is expected to increase in the next 1-2 years, this may be an option to consider.
WHY WOULDN'T THE BUYER ASK FOR A PRICE REDUCTION INSTEAD?
Let’s look at the numbers: in order for the monthly mortgage payment at 7.5% interest to match the 6.5% interest rate monthly payment, the buyer would have to negotiate the purchase price from $300k down to roughly $270k (10% down payment in all scenarios). A price reduction of $30k, or 10% of list price. Which is significant… demand is lower relative to the summer of 2021 but not that low. Even more drastic, in order for the monthly mortgage payment at 7.5% interest to match the 5.5% interest rate monthly payment, the buyer would have to negotiate the purchase price from $300k down to roughly $245k. A price reduction of $55k, nearly 20% of list price.
So, yes. The dream would be to negotiate a 20% price reduction, but in the event the seller doesn’t agree to that, you have another option to reduce your monthly payment.
WHY WOULD A SELLER AGREE TO PAY FOR A BUYDOWN PROGRAM?
If the buyer agrees to and is eligible for a buydown program rather than a significant price reduction, the seller could walk away with a higher profit. A buydown program may actually be more attractive to a buyer than a price reduction, because of the immediate monthly payment impact. Also, in areas where other similar homes are listed for sale at the same price, this could set the seller’s home apart from others.
WHY CONSIDER THIS OPTION?
Using a buydown program is a great opportunity if you want to buy a home now, rather than wait for interest rates to decrease in the future, and still get a temporary break on your monthly mortgage payment. Don’t pass on home buying now just because interest rates are relatively high. Demand has slowed and inventory is higher compared to the summer, giving buyers more options and time. A buydown program may be the ideal option if you plan on refinancing in the next year or 2 anyways.
THINGS TO KEEP IN MIND: there are limits on third party contributions to a buyer’s closing. Ask your lender for more details on these values. Also, these buydown programs are only eligible in conjunction with certain loan types.
DISCLOSURE: All numbers listed above are estimates. Contact your lending expert for details on your specific situation, interest rates, contribution limits, and eligibility.
Comments