If I pay money to your lender to lower your mortgage rate — permanently — will you make me a better offer on my house?
That’s a question that could become more commonplace as home sales slow, prices erode and mortgage rates increase. The cooling off trend is well underway in many areas, according to Veros Real Estate Solutions, a Santa Ana, California, analytics company. Veros’ forecast for the coming year, released last week, reported that prices in “all but the most upbeat [markets] are slowing” across the country, and one out of five markets could see year-to-year declines.
But could mortgage assistance by sellers for buyers help cushion the impact of these market shifts, bridging the gap between what owners want — or need because their equity positions are thin — and what increasingly picky buyers are willing to pay?
Realty agents and lenders in some areas believe the answer is yes. Agents have begun touting “seller-assisted below market rate financing” on the lawn signs they post outside their listed homes. Others are boning up on a marketing technique that’s long been used by home builders but rarely seen in resale transactions in recent years: interest rate buy-downs.
The idea is straightforward. To make their house more attractive to buyers as a financial proposition, sellers can offer to lower buyers’ long-term monthly mortgage expenses. The sellers achieve this by paying money upfront to the buyers’ lender in order to reduce the interest rate. The lower rate continues for the life of the loan.
The reduction might cost the sellers two or three “points” — a point is 1 percent of the mortgage amount — and produce a reduction in the buyers’ note rate of one half of a percent. The points paid by the sellers represent interest paid in advance. A larger cash payment of points would produce larger rate reductions.
David H. Stevens, president and chief executive of the Mortgage Bankers Association, says “we did a ton of buy-downs” on resales during 2006-09 when he was a senior executive with Long & Foster Cos., the country’s largest independent realty brokerage. In the right circumstances, Stevens believes, “they can be a pretty good opportunity” for sellers and buyers to come together on a deal, even with today’s lower mortgage rates. It’s all a matter of making sure the numbers work for both parties.
Oray Nicolai, a senior mortgage banker with Access National Mortgage, a subsidiary of Access National Bank, says rate buy-downs are particularly effective because they magnify the impact of the sellers’ financial concession by spreading it over many years. Buyers “keep getting the benefits of lower monthly mortgage payments for as long as they have the mortgage,” he notes.
Nicolai, who assists realty agents in structuring and presenting rate buy-downs to sellers and purchasers, provided this recent example. Buyers made an offer $50,000 less than the seller was willing to accept. By buying down the purchasers’ note rate by half a percentage point — from 4.25 percent to 3.75 percent fixed for 30 years — the sellers were able to get the price they needed. Meanwhile the buyers ended up with the same monthly principal and interest payment at the 3.75 percent rate they would have obtained on a conventional fixed-rate loan at 4.25 percent with a 20 percent down payment. The sellers’ buy-down cost them $13,600 — an expense that under IRS rules was deductible by the buyers — and the sellers ended up netting $36,000 more than they would have had they accepted the buyers’ initial low offer.
But buy-downs can have important limitations: Some purchasers want seller concessions in the form of contributions to closing costs. Or they simply want a lower sale price rather than reduced monthly mortgage expenses.
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Plus buy-downs don’t work as well when the capital markets demand extra cash to buy down rates. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says a half percentage point note rate reduction may cost more than two points, forcing the seller to net less on the sale. Loan officers can usually explain how much of a rate break the current market is offering when points are paid up front.
Bottom line: Agents, sellers and buyers should at least be aware of the buy- down option. Then, if the numbers work and the buyer is open to a little creativity, make it happen.
Kenneth Harney is executive director of the National Real Estate Development Center.