Just before speaking with Fortune, Carol Walsh, a California-based real estate agent serving San Benito, Santa Cruz, and Monterey counties, was on the phone with a lender discussing how a lot of homebuyers, and in particular sidelined buyers, dont understand that mortgage rate buydowns are even an option right now.
Mortgage rate buydowns, a financing technique in which a seller pays a lump sum of money to reduce a buyers interest rate for a period of time, resurfaced last year like an old tool being brought out of the box again, says Walsh, as sellers attempted to attract buyers who were scared off by spiked mortgage rates. But buyers, Walsh says, have to understand how rate buydowns work before potentially talking a seller into it.
Rate buydowns can be broken down into two categories: long-term and short-term (or temporary, as most refer to it). Long-term rate buydowns span through the entirety of the loan, Walsh says, and are much less common because its so much more expensive to buy it down over the long term. As for temporary buydowns, which also vary, a seller essentially pays a lump sum of money to reduce a buyers mortgage rate for just a few years. For example, a 3-2-1 rate buydown sees the sellers credit used to reduce the buyers rate by 3 percentage points the first year, 2 percentage points off in the second year, and 1 percentage points off in the third year, before returning to the note rate (which the buyer has to qualify for). While for a 2-1 buydown, the sellers credit is used to reduce the buyers rate by 2 percentage points the first year, and 1 percentage point in the second year, and then in the third year, the buyer pays the note rate.
Walsh said the 2-1 buydown seems to be the most common, so lets take a closer look at how it works. Lets say a buyer is purchasing a $600,000 home and is taking on a $480,000 mortgage at a 30-year fixed rate of 6.5% (which is close to the current market rate), their monthly payment would be roughly $3,034. However, with a 2-1 mortgage rate buydown, for the first year, their monthly payment would be around $2,432 (at a rate of 4.5%). For the second year, their monthly payment would be $2,725 (at a rate of 5.5%). That being said, the buyer is saving $7,222 the first year and $3,702 the second year. Thats roughly $10,925 the buyer is savingpaid for by the seller.
So how exactly does a seller buy down a mortgage rate for a buyer? There are a few ways to go about it, Walsh said, but start by looking into lenders. That can mean checking out different options, like a local credit union, a local mortgage broker, and a local bank, to see what they offer as theres no standard across the board. After doing so, thats when the real challenge begins: getting the seller on board.
Its really important that buyers understand, this is much more likely when youre [looking into] a house thats been on the market for a little bit, perhaps in areas that arent asdesirable, Walsh told Fortune. Youre going to have more flexibility in being able to negotiate a credit with a seller to make this work.
As a potential buyer, that means taking those factors, like location, into consideration and readjusting your perception of the ideal home. Still, Walsh said, theres no cookie cutter option because everyone has a unique situation. Thats why its important to work with someone who knows the realities of their market, Walsh said. Nonetheless, if you were to qualify for a loan at the current rate, get the seller to agree to the credit, then as part of a contract, [theyd] buy that rate down and lower your payment to a more comfortable level, Walsh said.
Once a buyer has reached contract negotiations (after working with a real estate agent and lender and receiving pre-approval), they simply ask for a sellers credit in the form of a rate buydown. The way Walsh suggests buyers do so, is by offering a seller their asking price and asking for a credit.
Sellers are much more likely to say yes when, lets say, the house is $700,000 and its been sitting on the market, Walsh said, adding, youre going to get, probably, a more favorable response offering $700,000 and asking for a $20,000 credit versus just offering the seller $650,000.
Its important that the credit is identified in the contract as coming from the seller to buyer, so the lender can take that information and adjust the buyers payment, using the sellers credit toward a rate buydown, Walsh clarified.
But heres something to note, markets across the country are experiencing different circumstances, and within each market theres variation among certain tiers. Buyers out West, where the housing correction has been the strongest, might have more luck getting a buydown than their peers buying in more resilient Eastern markets. Simply put: The more buyer competition for a given house, the less likely a buyer can negotiate a mortgage rate buydown.
Walsh says shes seeing the most demand at the starter home level, so thats where the competition is, and itll be harder to get a seller to agree to a rate buydown. The move-up and luxury markets, for the most part, arent seeing that same level of demand, so theres a bit more flexibility in negotiating that sellers credit, Walsh says.
