Loan Buy-Downs in Purchase Negotiations

This article content is provided by Aaron Hinson with Luna Lending, Inc. who is a local Tahoe mortgage broker our clients highly recommend.

2022 was a very volatile year for the economy and mortgage rates. The previous year of record-breaking low rates drove a high level of buyer demand was coupled with low inventory. This created a market very favorable to sellers. Buyers were getting into bidding wars with and not much room to negotiate. 

This year we saw Conventional mortgage rates get has high at 7.5% and they are currently in the high 5’s to low 6’s for well qualified buyers. The silver lining in the higher mortgages rates is that buyers are seeing more opportunity to negotiate by offering either less than asking price and/or getting seller credits to apply towards closing costs or interest rate buy downs, both of which can provide huge savings. We’re also seeing Sellers offering concessions in the form of Seller Credits in their offers to increase attention to their home which is often far more attractive to buyers than lowering their asking price.

Buy-Down Options

Although there are different variations of this strategy and you should definitely consult with your trusted mortgage professional to discuss your specific options. In general when obtaining a seller credit to use towards buying your interest rate down there are two main options. 

  • A) Permanent Rate Buy Down. This is effectively using the seller credit to buy your interest rate down for the life of the loan by paying “points”. As an example: if the offered rate were 5.875% for a $600,000 home with 10% down payment, then 1.746 points or $9,428 could be paid to buy the interest rate down to 5.375%. The lower interest rate decreases the monthly payment by $171 a month for the life of the loan. As an alternate: offering $590,000 vs $600,000 for the home only decreases the monthly payment by $53 a month.
  • B) Temporary Rate Buy Down. 3/2/1 and 2/1 Seller Buy Downs. These options lower the interest rate for the first few years of the mortgage before reaching the final rate. The seller credit pays for this buy down. Using the same example as above:

2/1: Buy Down, year 1 rate = 3.875%, year 2=4.875% then year 3 and forward it goes to 5.875%. The total savings would be $11,899 which would be the amount of credit needed from the seller.

3/2/1 Buy Down, same as above but year 1 is 3% lower. Total Seller Credit = $23,345

* What is very attractive about the Temporary Seller Buy Down, is that if the loan is refinanced or paid off before all the interest savings are applied, the remaining amount will be credited back in the form of a reduction to the loan payoff.  In the 3/2/1 buy down if rates drop before the 4th year and $9,000 has not been used, that would be credited back.  

What to choose?

Each situation and home buyers’ goals are very different so it’s important to talk with both your mortgage and Real Estate professional as a team to dial in the best strategy. Sellers are also offering these types of credits upfront to get ahead of them being requested in the offer and before doing a price drop, knowing that 10k to 15k Seller Credit may get a lot more eyes on their home than a $20,000 price drop.

It will be very interesting to see what mortgage rates do in 2023 but currently these are some of the best strategies to leverage this market to your advantage and save.

** Not an obligation to lend and loan figures used are for informative purposes only and do no expressly represent a quote of actual loans terms.  Aaron Hinson NMLS 134718, Luna Lending Inc. 2032089. Equal Housing Opportunity. 

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