The "Seller Buy-Down"

In the last few weeks, the market for fixed rate mortgages has seen the largest shift since 2004. At the time of writing this, the FED has decided to raise interest rates by .75% in an attempt to curb rising inflation. That means it will cost buyers more money to borrower money. That's the bad news.

The good news is, the FED is doing a wonderful job at pricing investors out of the market. This is has created the first shift agents and buyers have seen in years that benefit them. Gone are the days of "no contingency, no inspection, $100k over-ask" offers landing on the kitchen table of awaiting sellers.

A balanced (if not buyer-friendly) purchase market is finally reemerging and buyers can finally take advantage of it.

Agents, if you see a home has been sitting for a while, instead of offering below list price, consider asking for the same amount in seller concessions. This is called the "seller buy-down". This strategy will almost always save your client more money monthly, and offers the same amount of cash to the seller at closing.

"Seller concessions" are closing costs the seller is willing to pay for the buyer at closing. These concessions can cover any and all closing costs.

With the "seller buy-down" program, we are suggesting that you use the seller concessions to pay for discount points, reducing the buyer's monthly payment on the mortgage.

A "discount point" is an up-front fee paid at closing for a lower interest rate over the life of the loan. One "discount point" is one percent of the loan amount on the home.

Here is an example:

$500,000 (Purchase Price) - $100,000 (20% down) = $400,000 loan amount

1 Point = $4,000 (1% * 400,000) | 2 Points = $8,000 (2% * 400,000)

Traditionally, a good rule-of-thumb was that paying one discount point would reduce the interest rate on the loan by .25%. Today, that number is closer to .75%

Here are some examples of what that means for a buyer's monthly payment:

Let's say you have a first-time homebuyer looking to purchase a home for $500,000 and putting down 5%. Here is a breakdown of their $475,000 mortgage payment at the current market rate - 6.25%:

Mortgage $2,924.66 + mortgage insurance $150 = $3,074.66

Here is that same mortgage with two "discount points" ($9,500), bringing the mortgage rate down to 5.375%:

Mortgage - $2,659.86 + Mortgage Insurance - $150 = $2,809.86

Monthly savings - $264.80

Compare those savings to offering a lower purchase price.

Same scenario as above with the original monthly payment $3,074.66. Now, the agent decides to low-ball the list price and sends in a new offer at $490,000 with 5% down making the mortgage $465,500:

Mortgage - $2,866.16 + Mortgage Insurance $147.41 = $3,013.57

Monthly savings - $61.09

In this scenario, the buyer would be saving $204 more per month by doing a "seller buy-down" than if they offered below list price.

The best part, the seller would get exactly the same amount of money at closing in both scenarios.

Another option would be to use the seller concessions to pay for the "mortgage insurance".

Mortgage insurance is required to be paid on any loan where the borrower puts down less than twenty percent. Mortgage insurance can be paid monthly, or up-front in one lump sum. This is called a "single premium".

For the same house we were looking at before, (500k purchase 5% down) the estimated "single-premium" quote is about $6,200.

Let's take the same example above (500k purchase 5% down) which had an estimated monthly payment of $3,074.66.

In this scenario, let's say that the agent asks for the same 10k in seller concessions; pay one discount point (rate = 5.625%) and pay for the mortgage insurance up-front premium. Here is the estimated payment:

Mortgage - $2,734.37 + mortgage insurance - $0 = $2,734.37

Monthly savings = $340.29

The beauty of this strategy is that the seller gets the exact same amount of money with all of these scenarios. A buyer is not taking money out of their pocket. They are merely using the new leverage they have in the market to make their own payment as comfortable as possible.

Tax deductible

An added benefit to this strategy is that these "discount points" are tax deductible the year you purchase the home.

The IRS views "discount points" as prepaid interest on the loan. Therefore, it is tax deductible up to a loan amount of seven-hundred and fifty thousand. See below a snip from the IRS guidelines:

This can help reduce your tax liability for the first year you own the house.

In summary, if you are an agent planning on low-balling the seller. Don't. Use the "Seller buy-down" method instead. Ask for seller concessions for discount points and mortgage insurance. Get your buyers a comfortable payment.