With today’s high mortgage interest rates, potential buyers may believe buying a home is beyond their reach. But you can help soften the high interest rate sting and make the dream of homeownership a reality for buyers by explaining mortgage discount strategies that at least temporarily lower their interest rate.
Two paths to lower borrowing costs
Buyers can lower their interest rate on a home loan through a temporary or permanent buy-down of their rate.
Temporary rate buy-down
In a temporary buy-down, one party to the sale – generally the seller or builder, as an incentive to the buyer – pays cash upfront to lower the rate for a specified period, usually one or two years. The money is held in escrow until closing. For example, in a 2-1 buy-down, the seller pays cash to lower the interest rate by two percent in the first year and one percent in the second. Starting with year three, the loan returns to the full rate for the remainder of its term.
At times, the buyer pays the temporary rate buy-down.
If your client is the seller, you can suggest a temporary rate buy-down as an incentive to attract buyers or to close the deal with a reluctant buyer. If your client is the buyer, you can suggest they use a request for a temporary buy-down as a negotiating tool.
Note that with a temporary rate buy-down, the lender underwrites the loan based on the borrower’s qualification at the full interest rate, not the discounted rates. Also, if the borrower does not put 20 percent down on the purchase, he must pay monthly private mortgage insurance (PMI). This will offset some of the buyer’s savings from the temporary buy-down.
Buyer-paid discount points
A second strategy is for the buyer/borrower to purchase discount points to buy down the interest rate permanently.
Each discount point is the equivalent of one percent of the loan amount. On a loan of $300,000, for example, each point is $3,000. Each discount point paid lowers the interest rate by 0.25 percent for the life of the loan. A borrower paying $3,000 receives a quarter-point discount from the full lending rate over the life of the loan; a buyer paying $6,000 lowers the rate by 0.5 percent. Over the life of the loan, that discount adds up to substantial interest savings.
Buyer-paid discounts work best if the buyer intends to own the home long enough to recover the total points paid through the lowered monthly mortgage payment. When you join Fathom Realty, you will access extensive training, cutting-edge technology, and local support from experienced leaders. We are committed to helping you grow your business and succeed in the real estate industry. Join us and become part of the Fathom family that values service, strong culture, and excellence in all that we do. Additionally, through our brand, Encompass Lending Group, we partner with real estate agents to provide a seamless transaction, further enhancing your journey in this dynamic industry.