15 December 2022

The news of rising mortgage rates is a constant in today’s headlines. As expected, these increases make the home purchasing dream more difficult for buyers. Just a 1% rate increase can result in an additional $200 to $400 in each monthly mortgage payment, for instance, thereby reducing purchasing power for some borrowers. Rate increases don’t only affect buyers, however; as decreased affordability can translate into fewer showings and offers for sellers as well.

One option for a seller with a home sitting on the market for some time would be to reduce the asking price. There is another potentially better  alternative, however: a seller-paid interest rate buy-down. In a buy-down scenario, the seller provides a monetary concession to the buyer who, in turn, purchases discount points in order to obtain an interest rate below market (in accordance with their respective qualifications).

Utilizing this strategy can help sellers and buyers meet in the middle in this high interest environment. Moreover, there are additional benefits:

• For the homebuyer— in addition to relieving some of the fears regarding rising interest rates, buy-downs provide homebuyers with immediate and long-term benefits. Initially buyers can take advantage of a lower mortgage rate, reducing out-of-pocket expenses at the time of purchase. Over the long haul, they’ll pay less interest over the life of the loan, saving most likely tens of thousands of dollars. Additionally, a buyer utilizing this strategy is far more likely to get their offer accepted as they are proposing to purchase the home at list price.
• For the seller, who may be concerned about reducing the price on their home by $30-$40,000 (or more), the price of purchasing discount points on a mortgage is usually significantly less.
  Each discount point is 1% of the loan amount, and each point reduces the rate by .25%. So if a seller purchases two discount points on a $500,000 loan, they’ll pay an extra $10,000 in fees at closing to reduce the buyers rate by .50%.

This is just a quick overview of the process; every lender has different products and qualification parameters so buyers (and sellers) should do their own research, but in this high interest rate market, the seller paid buy-down can be a powerful tool.

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