Sellers are looking for ways to get their homes sold. The first thing they do is reduce the price. Sellers also pay for all repairs, especially the Section 1 items from the Termite Report. There can be an allowance for new carpet, or bathroom remodeling. There’s also the NRCC (Non-Recurring Closing Costs) category where Sellers pay for the costs of the buyer’s financing.Sometimes they stop there. We’re here to tell you that there might be something else Sellers can offer. What we’re talking about here is an interest rate buy-down. This is one of the things New Home Sellers use to stimulate activity when sales start to slow down at their new subdivisions. However, individual Sellers rarely turn to buy-downs as a sales stimulus. Not because the move doesn’t work for them, but because their real estate agent doesn’t realize the option is available, and doesn’t advise them of the option.
A buy-down is a tactic where the Seller pays the buyer’s lender money to lower the Buyer’s interest rate on the new loan. Although the rate can be bought down for the life of the mortgage, it is common to have Sellers buy down the rate for the first two or three years of the mortgage.
Buy-downs are not part of a strong Sellers Market. After all, who needs them when potential buyers are knocking down doors to become home owners? But, now that we are in a Buyers Market, buy-downs have returned.
Lew Sichelman writes in a special article to The Chronicle, “The object of a temporary buy-down is to bring the initial rate down to a point where the buyer can either qualify for financing or can’t resist the lower monthly payment.”
Sichelman goes on to point out that buy-downs usually come in two versions: The “3-2-1 Model,” where the rate is bought down by the Sellers to three percentage points below the market for the first year, two points for the second year, and one point for the third year. The second model is the “2-1 Model,” works the same way except the rate is bought down by two percentage points in the first year and one point for the second year. A third version is a permanent one in which the rate is bought down just enough to make the property purchasable, for the entire life of the loan.
Once the buy-down period ends the rate returns to where it would have been had there been no reduction.
To see Sichelman’s complete article click here.
Here’s another opinion by Henry Savage.
Your real estate agent should be able to talk to you about Buy-Down options, whether you are selling or buying, or both.
