When it comes to negotiating real estate prices and payments, buyers and sellers face challenges they haven’t seen in a long time. Buyers are often hesitant to proceed when they know that higher interest rates will result in increased monthly payments and sellers struggle getting desired value for their property due to buyers’ sticker shock from recent rate hikes. As a result, properties are more likely to linger on the market for extended periods, which in turn, lowers their perceived value in the eyes of the buyer.
Rather than reducing the price of a property to attract buyers, sellers can benefit from utilizing a temporary rate buydown strategy that aims to maintain a fair listing price while ensuring buyers are comfortable with their monthly mortgage payments. Here’s how it works:
- The seller contributes funds to an escrow account at closing.
- The mortgage company offers the buyer a lower interest rate, typically 2% below the note rate, during the first year of repayment.
- In the second year, the funds in the escrow account are used to further reduce the buyer’s note rate by 1%.
- By the third year, the buyer’s payment returns to the actual note rate, as the buydown period concludes.
The funds used for the buydown can come from various sources, such as the buyer’s or seller’s agents, or even from the seller of the house themselves. Opting for a three-year buydown provides customers with peace of mind, knowing they have ample time to refinance the property if desired.
Implementing a rate buydown solves three critical problems:
- It mitigates the sticker shock of a high-interest rate, encouraging buyers to move forward with the purchase.
- Buyers don’t have to bear the cost of obtaining a lower rate; instead, the seller invests in the buydown on their behalf.
- Buyers are more comfortable paying the full listing price, as the reduced interest rate adds value to the transaction.
The rate buydown serves as a tool to expedite the transaction process. It removes the bottleneck often faced by buyers, as sellers offer them a buydown opportunity. Sellers also benefit from entering into a sale at a higher interest rate, and all parties involved are satisfied when reaching the closing table. To further maximize the benefits, it’s recommended to limit lender fees and devise a future plan for refinancing at a lower rate (for more information, contact us today).
Additionally, sellers can offer credits toward the buyer’s costs to further facilitate the buydown process. A typical scenario involves the buyer requesting a $20,000 buydown to offset their monthly payments. The contract would indicate the full price, with the seller agreeing to pay $20,000 toward the rate buydown. In the listing agreement, it’s important to include a predetermined percentage (e.g., 3%) toward the buydown. It’s crucial for seller agents to familiarize themselves with the process and supporting documentation. A properly executed buydown can serve as a powerful selling tool and show that you as an agent possess invaluable knowledge that everyone can benefit from.
Factors such as credit scores and the amount of down payment influence loan level price adjustments, which determine the terms of purchase. Educating buyers on the benefits of going for a few years with a plan to refinance after three years is essential, particularly as FHA and VA loans become more attractive when conventional loan rates rise.
By employing buydown strategies, sellers can shield themselves from the effects of high-interest rates and improve their chances of making successful sales.
To learn more about utilizing interest rate buydowns to enhance your home sales, contact New Path Title today. Our experienced team is ready to provide valuable insights and guide you through the process. Take advantage of this powerful tool and stay ahead in the competitive real estate market.