What’s the #1 pain point for home buyers today? The monthly payment as interest rates have risen by 1% over the last year. So, here’s a solution for you that I can guarantee you that many of you have never thought of as this idea goes back over 20 years.
It’s a seller paid interest rate buydown and it can be used on a conventional loan, a FHA loan, or a VA loan. The buydown can be done in one of two ways. First, is a 1 year 1% rate buydown. For example, the long-term rate is 5%; but for the first year the rate is 4%. The cost to the seller is about 0.71% of the loan amount or roughly $2800 on a $400k loan.
The second option is a 2/1 buydown in which the interest rate the first year is 2% lower (3% in my example) and in the second year the rate is 1% lower or at 4%. Then, after the temporary interest rate buydown the payment is the normal long-term rate and won’t change again.
I ran numbers for a client looking at a home priced at nearly $400k who would be best served by a FHA loan with 3.50% down, which currently has a rate of 4.875%.
The first year your rate would be 2.875% and second year your rate would be 3.875% and your rate from year 3 thru year 30 would be 4.875%. This costs the seller about $8250 or about 2.125% of the loan amount.
Thus, in year 1 your principal and interest payment drops to $1609. For your second year your principal and interest payment is $1823. Then, for year 3 thru 30 your P&I payment is $2000 a month. In this instance my client would save nearly $400 a month the first year which is HUGE!
This solves a MAJOR PROBLEM for our buyers—payment shock. Second, for a home seller instead of dropping the price, instead offer to pay for a temporary interest rate buydown and sell your home for full price!
So, as a listing agent how do you advertise this offer? I would post this listing and idea on Facebook and other social media sites. Second, I would create a flyer for the home offering this money saving idea. Third, use this flyer and host open houses with it.
One of our banks will also pay for this buydown if the borrower accepts a higher long-term interest rate from year 3 through 30 and a higher starting rate as we pay for the cost of the buydown by raising their interest rate.