A Lender Paid Buy Down Helps Buyers and Sellers!

A temporary buy down is an incredible tool for both buyers and sellers. I have used this method in some variation or another for nearly a thousand transactions. The method described here is only one out of an endless number of structures. The short version is we begin with a long term fixed rate loan, and temporarily buy down the interest rate for the first year by 1%.  Best of all, I pay for the cost of the buy down so buyers and sellers love it!

It benefits both sides of the transaction in different ways.

For the BUYER:

THE CERTANITY OF A FIXED RATE MORTGAGE
LOWER PAYMENT FOR THE FIRST YEAR
NO NEGATIVE AMORTIZATION
NOT AN ARM MORTGAGE
NO OUT OF POCKET EXPENSE AT CLOSING

THE CERTANITY OF A FIXED RATE MORTGAGE
We lock in a fixed interest rate in the beginning for 30 years and this is the rate that is used for as long as you keep the loan. You know in advance what your principal and interest payments will be for the entire 30 year period.

LOWER PAYMENT FOR THE FIRST YEAR
Next, we lower the interest rate for the first year; this is called a temporary buy down. There is a hard dollar cost to do this, the same as there is if we bought down the rate permanently for thirty years. But the same up front cost makes a much lower payment if it is based on one year instead of thirty. That makes sense, right? The shorter the period the bigger the difference will be. Because the payment is so much lower for the first year it really helps buyers make the transition by spreading the increase over 2 years.

NO NEGATIVE AMORTIZATION
This is a FIXED RATE LOAN, it is NOT an Option ARM or some other negative amortization product. The difference in payments for the first year is NOT added to your loan amount. This loan balance is reduced every time a payment is made on time.

NOT AN ARM MORTGAGE
Again, just because it acts like an ARM for the first year by having a lower payment, it is not an AMR, it is a FIXED RATE MORTGAGE.

NO OUT OF POCKET EXPENSE AT CLOSING
Exactly what it sounds like, I pay for the buy down. The buyer, seller or lender is allowed to pay for a temporary buy down. In today’s real estate market it is often difficult for the buyer and seller to cover their expenses let alone someone else’s. Why not make it easy, I’ll pay it for you. And why would I do that you ask. Simple, a little piece of the pie is better than none. Just be sure to set it up properly from the very beginning. The new RESPA laws have some very quirky disclosure rules. If everything is not put in the application correctly up front, changes down stream will trigger new disclosures and may require starting over. In some cases a change can cause us to not be able to close the loan at all. Welcome to my world!!

For the SELLER:

HELPS SELL YOUR HOME
ADVANTAGE OVER OTHER SELLERS
INCREASES INTEREST OF HOMEBUYERS
MAY SHORTEN DAYS ON THE MARKET
NO OUT OF POCKET EXPENSE ON THE FRONT END

HELPS SELL YOUR HOME
This is a no-brainer, anything you do to help make it more affordable for a buyer increases the odds of selling the home. 

ADVANTAGE OVER OTHER SELLERS
If the guy across the street is trying to sell a home about the same size, quality and price as yours, who wins if the buyer gets a much lower payment buy purchasing the one with a buy down?  The seller that offers the buy down of course.  From experience I can share that the higher the price the more the payment becomes an issue.  The exception of course is a cash buyer.  (what's that?)  

INCREASES INTEREST OF HOMEBUYERS
Typically, a buyer work backwards from the payment they can afford to arrive at the price range they can afford.  This is strange but it is a reality.  In fact, all of our underwriting guidelines also focus on affordability, but they view it from the opposite direction of a buyer.  Underwriters work from sale price to payment and buyers go from payment sale price.  Ultimately they arrive at the same destination but understanding the path they take is a big advantage for a seller.  If a buyer inquires about your home because they can afford the price range and discovers your marketing materials include a buy down, you have their attention.  And why not?  They expected a home of this price to cost $xxxx.xx per month and you show a method that initially lowers the payment to $xxx.xx per month, what do you expect would happen?

 MAY SHORTEN DAYS ON THE MARKET
Anything that makes your home stand out could shorten the marketing period.  No where in this material have I implied the buyer can purchase a home they can not afford.  This is a fixed rate mortgage and the buyer must qualify at the note rate, not the bought down rate.  But it does help make the transition period much easier for any buyer.  On a loan of $160,000 a 1% reduction in the initial payment rate will make almost $1,600 a year difference in the payment or a little over $100 a month.  And the higher the loan amount the more difference it makes, at $400,000 it jumps to almost $4000 per year.    

NO OUT OF POCKET EXPENSE ON THE FRONT END
Most marketing efforts require a sizable up-front financial commitment. This method does not cost a penny to the seller. That is unless the seller decides to piggy back on the temporary buy down with a permanent one! That combination creates a truly breathtaking proposition, and it is significantly better than negotiating on price. Paying a point or two is better than lowering the price five or ten percent. Regardless of the route chosen, selling a payment is far superior to justifying a sale price, and a lot easier.