Buyers - Do You Know About Rate Buydowns?

There’s no doubt that buyers have a little more say in the real estate market today than they did just even a few months ago. Increasing inventory levels and longer days on market are giving buyers options and time to make purchasing decisions, and sellers are more willing to give concessions to make their home more competitive. 

So why aren’t buyers out there scooping up all the available inventory? Higher mortgage interest rates are impacting affordability on top of already record-breaking prices for many would-be buyers and consequently cooling off demand in today’s market. Rates reached a 13-year high in July at 5.8%. To give perspective, they were at 2.87% the same time last year. Luckily, rates took a dip this week to below 5% for the first time since April 2022. This change is a welcome one to buyers who were possibly priced out of purchasing or disqualified from obtaining a loan due to escalating interest rates. With the Federal Government actively increasing their benchmark rates to combat inflation, we may just see them on the rise again. Because of this, buyers need to know other options that can help them obtain their goal of homeownership.

Enter the Rate Buydown. 

What it is:

A rate buydown is a mortgage financing technique to help buyers qualify for a mortgage loan and receive a reduced interest rate for a lower monthly payment by making a lump sum payment up front. The lower rates are typically effective for the first couple years of the mortgage loan life, and then increase to the standard rate over time. Some are effective for the entire life of the mortgage loan. Different lenders approach rate buydowns differently and may not offer them to everyone. It’s important to shop lenders to obtain the best rate and best program that works for you.

How it works:

A buyer can decide to conduct a rate buydown on their own, but we've seen sellers pitch in on them as a concession instead of agreeing to a price reduction. During negotiations of a property sale, sellers can agree to essentially subsidize a portion of the purchase price on behalf of the buyer by buying a discount or points on the mortgage loan via a lump sum payment. That payment to buy mortgage points reduces the interest rate and leads to a lower monthly payment for the borrower. 

The cost of mortgage points is based on the size of the loan, with one point representing 1% of the mortgage. For example on a $800k mortgage loan, one point would equal $8,000, two points would equal $16,000, and a half point would equal $4,000. In the chart below, you can see how increasing the points creates significant cost savings in the monthly payment and over the course of the loan compared to a reduction in the purchase price.

Who it Benefits:

This technique can be impactful for borrowers who would need the extra savings in order for a home purchase to make financial sense at that point in their life. Some borrowers may anticipate increases in their income over the years, so a rate buydown can be an opportunity to make a purchase now, and be able to keep up with the increased payments later on.

The Pros of a Rate Buydown:

• Temporary or permanent reduction in monthly payments
• Ability to obtain a mortgage loan
• Helps offset the cost of increasing mortgage rates and housing prices

The Cons of a Rate Buydown:

• Initial upfront cost may not be doable for some borrowers
• If income doesn’t increase to match the higher interest rate (or a 3-2-1 or 2-1 structure), the borrower may not be able to make the monthly payments

We recommend reaching out to your favorite lender(s) to learn what a rate buydown can look like for you. 

Data provided by Synergy One Lending

Monica Davis, Branch Manager NMLS: 92376

Phone: (208) 863-5985

Email: monicadavisteam@s1l.com