“Mortgage Buydown”, Real Estate’s Hot “New” Term. What Is It?

Mortgage Buydowns became a standard in the real estate industry in the early 1980s, when interest rates were at a historical high of 18%. Understandably, 18% interest was too high for many home buyers to qualify for a home loan, which led to creative solutions becoming a standard in industry practices.

For many who could not qualify for a loan at 18% interest, they opted to partake in a Mortage Buy-down Program, which allowed homebuyers to lower their rate and qualify for a better, more affordable loan.

What is a “Mortgage Rate Buy Down”?

As a home buyer, when you apply for a mortgage your lending partner will include with your loan a standard interest rate. This is essentially a fee that you, as the consumer, pay for the lender’s risk of offering you the loan. These rates are pre-determined by a number of factors, including, market supply vs. demand and inflation.

To keep things straightforward, a mortgage buydown is a financial agreement where you, as the buyer, seller, or builder pay mortgage points at closing to obtain a better, lower rate. Typically, the one-time fee will cover the difference between the standard and the new rate.

How do I buy down my rate?

A buydown can be done in a couple of different ways and will depend on your lender, current financial situation, or the financial abilities of your agreement partners (the seller or builder).

As stated above, to buy down a rate you buy or pay for points. Typically 1 point = 1% of the loan amount, which often (unless specified differently by your lender) reduces your rate by .25%.

To put that into perspective, let’s say your lender offers you, the borrower, the ability to lower your rate by .25% for the purchase of 1 point. If your loan amount is $300,000 and your interest rate is 6.5%, you would pay $3,000 (1% of $300,000) to lower your interest rate to 6.25%.

It is important to note that there is a difference between a temporary buydown and a permanent buydown. Likewise, there are a couple of different ways to go about these buydown scenarios. Connect with a Lender to discuss your options!

What are the benefits of a Mortgage Rate buydown?

As a buyer, there are a few benefits…

  1. You’re getting to buy a home that you may not have been able to afford otherwise
  2. You’re saving yourself money (potentially more than you’d imagine) in the long-term plan

As a seller…

Many sellers are being encouraged to consider offering what is referred to as “Speciality Financing”. What this means is that sellers are offering Seller Assistance in the form of payment towards the prospective buyer’s mortgage rate. This might sound like it’s only a benefit to the buyer, but here’s the thing…

  1. There is no greater benefit than being able to market your home to a larger target audience or buyers who can afford to buy your home.
  2. Sellers who offer Seller Speciality Financing often see better deals written on their home and are typically able to net more $$$ at closing.

If you’ve been struggling to find a home that you can afford or current interest rates scare you, consider reaching out to a licensed real estate professional who you can trust. If you’re not sure who to talk to, Furner Realty Group would be happy to answer your questions and connect you with our VIP Lender who offers competitive rates and strategies to help all of our clients achieve their goals.

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