When the housing market began to flatten, the first group of
sellers to offer concessions and incentives was the developers
and builders with large inventories of unsold housing. Upgraded
kitchens, landscaping and even cash back were some of the
enticements being offered in new developments. Now, individual
home sellers are getting into the incentive game with assists
from lenders.
One such incentive is the buy-down, in which sellers pay
up-front payments to reduce buyers'
mortgage rates. Buy-downs
have been popular with developers because they enable the
builders to offer savings without actually lowering their list
prices. That has the negative impact of lowering market rates
for new homes – and it also keeps the median prices in many
areas artificially inflated.
As an example, one buy-down arrangement is called a "3-2-1,"
because it lowers buyers' mortgage rates by 3 percentage points
during the first year; 2 points the next; and 1 point the third.
In the fourth year and thereafter home buyers are responsible
for their mortgage payments in full. It’s hard not to call this
concept an adjustable rate mortgage that is being adjusted by
the seller rather than the lender. Real estate agents are
apparently pumped up by the buy-down phenomenon. One Florida
broker proclaimed that “People think that the price is what
sells…But reducing the price won’t help very much. Terms are
what sell.” That sounds like a little hyperventilating; but
these are the times that try broker’s souls. This particular
mortgage broker is offering a plan whereby the seller pays down
the first two years of interest. That equates to the buyer
saving twenty eight percent of their payment the first year and
fourteen percent the second year.
Another form of buy-down provides employed by a Long Island
broker provides less of a break early on but lasts the life of
the loan. This buy-down concept provides that sellers can pay 2
percent of the entire mortgage amount to lower the interest rate
by half a percentage point.
As an example, the seller pays $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 loan; not a
massive monthly payback but worth almost $30,000 over the life
of the loan.
A Philadelphia realtor notes that many buyers prefer the
savings in the early years of the mortgage, as has been proven
by the ascension of
ARMs
to their present prominence in the industry. This particular
broker represents some properties that offer buyers a five-year,
buy-down plan: They would have an interest 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.
For the same reason that
ARMs make
sense, a buy-down of this type has appeal to buyers not planning
to stay in the house very long. Their plan may be an upgrade to
a better house or, going in the other direction, they may plan
to downsize in a few years. Getting the savings early on has
greater appeal.
