The Ins and Outs of a Mortgage Buydown
Interest rates have turned into a bit of a roller coaster ride in these last couple of years. After a thrilling drop in 2020, they climbed to a 14-year high in 2022. To start 2023, they doubled their 2022 start rating, and as of May 2023, we are still riding the rollercoaster week by week. Some experts are anticipating a decrease at the end of this year, but who can be sure?
Instead of waiting around with wishful thinking, we have a strategy that can help you knock down those mortgage rates a bit. The secret is nestled inside a tactic called the "buydown."
But before we get into what a buydown is, it's important to understand how mortgage rates affect both buyers and sellers. Here's a quick note to highlight just how significant these hikes can be. When taking a loan out to buy a home, a 1% increase in interest rates is not equal to a 1% monthly payment increase. Depending on the amount of the loan and the loan term, a monthly payment could increase as much as 15% every time the interest rate goes up a percentage, which means we’re talking about a difference of a couple hundred dollars per month; a significant amount of money during the life of your loan.
The impact on the buyer is obvious, but how does this affect the seller? Think about it like this: if all of your potential buyers are looking at a 15% increase in monthly payments, finding someone who qualifies for a sufficient loan may be tougher. You may initially feel inclined to lower your list price to get your home sold, but that may not be the best strategy. Situations like this are exactly why Fine Point Homes works with buyers and sellers alike to identify and implement the best tactics for playing the market!
With that knowledge under our belts, let’s explore the Mortgage Buydown, a method meant to help both buyers and sellers have a better fate in high-interest markets.
The Mortgage Buydown
The buydown is a process of buying "mortgage points" to lower your interest rates anywhere from approximately 0.37% to 1%—an adjustment that can be temporary or permanent, depending on the deal. Anyone can do this, from the homebuyer to the seller.
Let's talk about what it looks like if the buydown is seller-paid. In this scenario, the lender recognizes a portion of the seller's profit as a credit for the borrower to use on closing costs. The workaround comes in when the buyer instead decides to use that seller credit to pay for the mortgage points we mentioned earlier. That way, the proceeds can go towards buying down the interest rate rather than only being applied to the closing costs. This tends to be a more favorable option than lowering the listing price because it’s a win-win for both parties; you as the seller still profit as much as possible, while the buyer feels good about locking in a lower interest rate and being able to afford their monthly payment.
The most common (and simple) form of buydowns is buyer-paid. The homebuyer can pay a one-time fee at closing to use those mortgage points to lower their interest rate. When it comes time to pay their mortgage, they’ll actually be able to afford it! That means qualifying for a larger loan to afford the original list price, so everyone wins.
Fine Point Homes believes in cutting through the confusion around your perfect home - whether that’s buying new or upgrading your existing house. We simplify the process and stay in touch during every aspect so that you always know what comes next.
If you’re interested in setting up a conversation with our real estate team or have questions on a buydown, contact us here.