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Be Informed – The Mortgage Buy Down Theory

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Today we will discuss the mortgage buy down theory. This is used when interest rates are trending to rise. Funny that the fed central bank rate seems to have more impact than the long bond which is directly associated to mortgage interest rates. Therefore we have heard in the past few months that consumers have a fear of higher interest rates placing pressure on their ability to purchase a home. There are several legal ways to overcome this fear that most are not aware of or have forgotten.

So let’s discuss the mortgage buy down. Obviously the buy down scenario is something that can afford a buyer the option to use seller’s pre-paid interest to overcome advancing interest rates or assist in leveraging your buyer’s ability to buy a higher greater level property. This process is done in the offering stage and invites the seller to assist in recurring and non-recurring closing cost with applying a portion of the fees to buyers buy down of their interest rates.

Let’s follow this outline….. assuming there is an average homes value in the United States at $750,000. You can adjust this to any home or area. But for easy explanation I will use that value. The loan is 600,000 at the projected rate of 3.00% and the buyers are pre-approved at 600,000 at 3.00% or 2529 per month P&I and the rate goes up to 3.625% or 2,731 per month, how do we overcome the buyer’s remorse and fear of added payment which by the way isn’t that much but enough to cancel the deal.

Example 1 10yr ARM:

  • 10/1 ARM – have seller pay 1 point origination and 1 point buy down,
  • 2 points total paid by seller and buyer gets from 3.625% at .5 pt. origination which was buyer’s original costa reduction down to 3.00% at no points out of their pocket.
  • Payment comparison for a loan amount of $600,000, seller pays $12,000 total for buyer origination and rate buy down:
  • Rate 3.625% P and I: $2,736.31 cost originally to buyer $3k vs. Buy Down Rate 3% P and I: $2,529.62 no cost to buyer. OR it can be used to increase purchasing power.
  • Buyer can get +$50,000 more in loan amount: Payment at $650,000 @ rate 3% is within $5/mo as the payment at $600,000 @ rate of 3.625% in other words you can upsell the buyer into a more exclusive property at the same payment they were expecting at 3.625%

Example 2 30 yr fixed at 600,000 loan amount w a purchase price of 750,000:

  • 30 yr fixed – have seller pay 1 point origination and 1 point buy down, 2 points total paid by seller and buyer gets from 4.0% to 3.625% at no points out of their pocket. Payment comparison for a loan amount of $600,000,
  • so seller pays $12,000 total for buyer origination and rate buy down: Rate 4.0% P and I: $2,864.49 vs. Buy Down Rate 3.625% P and I: $2,736.31 no cost to buyer.
  • OR seller’s points can be used to increase purchasing power. Buyer can get +$28,000 in loan amount/purchasing power at roughly same payment.

When discussing financing with your client remember this….The difference between using an ARM financing and 30 year fixed is

–          30 yr @ 3.625% w/ 2 point seller buy down vs switching loan program to the 10 yr ARM, keeping 2 pt. seller buy down. You go from 4% down to 3% for either a $335/mo savings or you can combine both moves for a $78k increase to loan amount/purchasing power.

This technique is used when fear enters the world of real estate and uninformed buyers begin to pull back with “wait n see” attitudes expecting interest rates to magically retract which we all know is not the way to enter the market.

Offers on properties expecting to use this method should be made with the sellers buy down points in mind therefore looking for the leverage advantage rather than the price advantage in purchasing. And, your sellers will become buyers so the same works for a move up situation.

Be Informed – Ask Yourself: What’s the price I’m willing to pay for realizing my dream?

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