Attention Buyers: Consider Mortgage Buy-Downs from Desperate Sellers

Desperate times call for desperate selling measures.

We’ve already advised borrowers to consider contingency clauses in their mortgage contract. Now - keeping in mind the slow housing market and how many sellers are anxious to move their property - here’s another perk to take advantage of:

The buy-down.

Under the terms of this agreements, sellers actually handle-front payments to reduce buyers’ mortgage rates.

Popularity - and use - of buy-downs
Buy-downs are popular with developers because they enable builders to offer savings without actually lowering their list prices, which they hate to do because the lowered price becomes the new benchmark.

One such buy-down is called a “3-2-1,” because it lowers a buyer’s mortgage rate by 3 percentage points during the first year; 2 points the next; and 1 point the third. In the fourth year and ever after, home buyers make the full payment themselves.

“People think that the price is what sells,” said Earl Niemoth, founder of Real Estate on the Internet, a Web-based broker in Florida. “But reducing the price won’t help very much. Terms are what sells.”

In Niemoth’s buy-down plan, sellers pay down the first two years of interest. Buyers save 28 percent of their mortgage payment the first year, and 14 percent the second.

Example of savings on a mortgage loan
Niemoth recently shared the arithmetic for a client recently with CNN Money. The house cost $224,900. With a 20 percent down payment, the mortgage principal would be $179,920 and the monthly mortgage payment would be $1,049 a month, assuming a 30-year loan fixed at 7 percent.

The buy-down would lower that to $749 the first year and $900 the second year.

The incentive cost the seller $5,397.60 at closing.

Another form of buy-down provides less of a hit early on, but lasts the life of the home loan. According to Bob Moulton, a mortgage broker with Americana Mortgage on Long Island, sellers can pay 2 percent of the entire mortgage amount to lower the interest rate by half a percentage point.

It costs the seller, in this case, $5,000 to bring a mortgage rate down from 6.5 percent to 6 percent on a $250,000 mortgage. That saves the buyer $81 a month on a 30-year fixed rate mortgage - but buyers realize that same savings every month for as long as they own the home or have a mortgage.

Over 30 years, this adds up to nearly $30,000.

According to Julie McWorter, an agent with the ERA Davis and Linn brokerage in Jacksonville, the biggest benefit for sellers who offer this kind of deal is the big boost to buyer interest for properties.

“It really increases your showings,” she said.

Nancy Alperin, a home mortgage broker with Maxwell Realty in Philadelphia, said many buyers prefer the savings in the early years of the mortgage rather than spreading it out over the lifetime of the mortgage. She represents some properties that offer buyers a five-year, buy-down plan:

They would have a rate of 3.5 percent the first year, 4.5 percent the second, 5.5 percent the third and 6.5 percent the fourth and fifth.”Buyers want the savings now,” she says. “Everybody buys furniture and redecorates the first few years.”