It’s no secret 2022 was a weird year for real estate. Mortgage rates hit a 20 year high and both buyers and sellers had to adjust to the shifting market. Sellers weren’t seeing 10+ offers overnight, all over asking price, and buyers were seeing less competition with their offers. We’re seeing houses stay on the market longer, offers coming in at or even below asking, and even sellers offering concessions to buyers.
In a report gathered by Redfin, “Sellers gave concessions in 41.9% of home sales in the fourth quarter.” Although a straight credit to closing costs is never a bad thing, lets take another look at how buyers can leverage these seller credits: Rate Buydowns.
Buydowns were a big topic of 2022. I’m sure a lot of you have seen the different buydown options out there, both temporary and permanent. These buydown options can be great options on both the buyer and seller side of the transaction, saving the buyer some money monthly without sacrificing the sale price.
Today I’m going to focus on the permanent rate buydown.
I ran some numbers based on an imaginary scenario with a purchase price of $500k with a 20% down payment to determine the savings the buyer would have each month and how much it would cost the seller in total.
As you can see in the first column, with a loan of $400k at a rate of 6.875%/6.959% APR, the monthly principle and interest payment totals $2,627.72.
The next column details a scenario where the seller drops the price by $10k, ultimately costing them that $10k. This brings the loan amount down a bit and ultimately results in a monthly principle and interest payment of $2,575.16. This situation costs the seller $10k and saves the buyer $52.55 a month.
The third column shows a scenario where the seller offers a credit to buy the rate down permanently. The sale price stays the same but the rate drops to 5.875%/6.120% APR. The total monthly principle and interest payment comes out to $2,366.15, a savings of $261.56 a month for the buyer! That’s the same as them buying a house for about $450,230 at the initial rate of 6.875%/6.959% APR, ultimately giving them about $50k in purchasing power. All it costs the seller is $7,435.
To me this seems like a no brainer. If you’re in a situation where your clients and the other party can’t agree, offer up this as a suggestion. The seller gets to keep the initial listing price rather than lowering it and the buyer gets an awesome monthly discount!