Seller-Paid Rate Buy down: Strengthening Your Offer
A seller-paid rate buy down is an option that not many home buyers know about. This type of concession can be a win-win scenario for both buyer and seller. Including this request in your offer, will strengthen your offer while making your potential monthly mortgage payments more affordable.
In this unique moment in the housing market, home prices have risen and the FED’s decisions to raise interest rates has impacted the mortgage market. Affordability for home buyers is being stretched thin. This clever financing tactic could be a valuable tool in for home buyers in today’s market.
Let’s take a look at what a Seller-Paid Rate Buy Down is and how it can strengthen your offer to buy a home:
What is a seller-paid rate buy down?
It is making an offer with a higher home purchase price, in exchange for seller-paid points to buy down the interest rate on the mortgage loan.
A number of mortgage programs allow some flexibility with the use of seller-paid closing costs. When a seller accepts an offer that includes seller paid closing costs, they are conceding to trade a portion of the profit of the sale of their home to help the buyer with the upfront costs of purchasing the home. Essentially, rolling some of the costs of financing into the mortgage loan.
The seller-paid rate buy down could also be called seller-paid points. Paying points or buying down the interest rate, means that the overall cost of the loan is lower. Both lower monthly payments and total interest paid for the life of the loan, is a big savings for a home buyer.
What are the benefits for the home seller?
The seller can gain an overall higher profit by paying to buy down the rate for the home buyer. Paying points to lower the cost of financing for the home buyer, can potentially help the seller get a higher price for the home.
An offer that includes a seller-paid rate buy down, would come with a higher purchase price offer. This is because the seller would be able to afford a slightly higher purchase price if the seller agrees to concede part of that amount to reduce the cost of the loan.
What are the benefits for the home buyer?
Using the seller-paid points to buy down the interest rate on the mortgage, lowers the upfront cost of buying a home by rolling some of the financing costs into the loan.
Also, a lower interest rate will have monthly and overall savings for the home buyer. The interest rate on a mortgage impacts the monthly payments, meaning that buying down the interest rate will allow for a more affordable mortgage payment. A lower interest rate will also mean paying less in total interest over the 15, 20, or 30 year mortgage term.
What are the risks of a seller-paid rate buy down?
- It’s a different kind of offer…
The truth is that this financing tactic is unique and it can be confusing to some sellers who don’t understand exactly how it works. This is why it’s important to have a great realtor on your team who knows what they are doing. They will be in direct communication with the listing agent on your behalf.
- The home appraisal is a key component of the deal…
If the appraised fair market value of the home is less than the purchase price of the home, then a seller-paid rate buy down could be less effective. An appraised value of the property being lower than the purchase price means that either the buyer or seller will have to bring the amount of the difference to closing. The seller could agree to lower the purchase price, or the buyer can bring the amount to make up the difference with a higher down payment. If not, the purchase agreement may be voided. This means that making an offer that is close to the fair market value of the home is essential to making to seller-paid rate buy down work.
With elevated home prices and interest rates in the current housing market, this is a unique way to make a stronger offer with potential benefits for both buyer and seller.
Having an experienced mortgage lender and real estate expert on your home buying team could be key to your success in the current housing market. Reach out to our team to get pre approved for a home loan. We can also connect you to a great local real estate agent who can help you make a strong offer with a seller-paid rate buy down option.
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