What is a Seller Buydown and Why is It a Win-Win in Central Oregon?
So you want to buy a house in Central Oregon, but don’t want to pay over 7% in mortgage interest? We’re here to tell you there’s a way, and the Bend Relo team has used it to help seven clients in the last month close deals with lower interest rates. Let’s talk about mortgage buydowns.
What is a Temporary Mortgage Buydown?
A Mortgage Buydown is where the interest rate is reduced for the first several years and rises each year until it reaches the permanent rate. The best type is often a 3-2-1 buydown, where the interest rate is reduced by 3% the first year, 2% the second year, and 1% the third year. After 3 years, the borrower pays the full amount of interest from then on.
3-2-1 Buydown Breakdown
Let’s do the math on an average-priced home in Bend so we can see how this might look in real life, using a loan interest rate of 7% and a 3-2-1 buydown.
Assuming you’ve just purchased the average-priced home in Bend, Oregon (congrats, by the way), your loan will be $725,000 with a term of 30 years, and your monthly principle and interest payment is $5,069.
However, if we implement the 3-2-1 buydown, the monthly payments for the first 3 years would look like this:
• Year 1: 4.5% interest, $3.673/month ($1395 savings)
• Year 2: 5.5% interest, $4,116/month ($952 savings)
• Year 3: 6.5% interest, $4,582/month ($487 savings)
• Years 4-30: full 7.5% interest, $5,069/month — unless you refinance at a lower rate.
In this example of a buydown mortgage, the buyer saves a whopping 27% on their payments for the first year, 19% the second year, and about 9% the third year.
Is a Buydown Mortgage a Good Deal For the Buyer?
Buydowns are a fantastic tool for relieving financial pressure on first-time home buyers. If you’re the buyer, it can save you money for your first few years of home ownership to be put towards home repairs and improvements, or simply while establishing yourself in your community (tip: check out our article on seller concessions for more info about closing on your home).
In addition, if you make less money now but expect to be earning more after a couple of years, the buydown lessens your financial burden while you prepare to afford the full rate starting your fourth year.
What happens with that money when rates come back down?
These temporary buydowns act as an interest rate subsidy that pays part of the interest monthly until the end of the third year. But what if rates get to 5% after a year or so? You would then want to refinance your mortgage to a lower permanent rate, and the amount of subsidy that you have not yet used will be refunded. This is a lot better than simply paying extra points toward a lower interest rate.
Who Pays the Up-front Costs?
If you’ve been wondering about the money that isn’t being paid those first few years, here’s your answer: the up-front costs, aka the amount of the buyer’s discount, needs to be compensated to the lender before the interest rate is lowered. So, who can pay for the buydown?
• The seller: sellers may choose to pay the buydown to incentivize buyers to close on their home.
• The buyer: if a buyer has extra money up front, they may purchase a buydown at the start to lower their monthly payments later.
• The home builder: builders and real estate developers sometimes pay for the buydown to sell a new home more quickly.
• Employers: when employees relocate for work, employers sometimes choose to pay for a buydown to ease their transition.
Tip: here’s a great calculator to find the total of your up-front costs.
Why Would I Choose a Seller Buydown?
Perhaps you’re selling your home and wondering, “Why should I pay money so my buyer can have lower payments?” After all, aren’t you trying to get as much money as possible for your home?
Contrary to how it looks on the surface, a seller buydown is often a win-win situation. In a buyer’s market, where homes sit for weeks and sellers find themselves biting their fingernails while they watch their selling price steadily drop, a buydown can incentivize buyers to close on your home significantly faster and save you money in the long run.
In our example above, the up-front costs of the buydown is just over 4% of the home price. By comparison, in Central Oregon in September, the average home price reduction was 8% down from the original. By paying for a buydown early in the process, you can cut your losses by half!
Buydowns with Bend Relo
Here at Bend Relo, we are always shooting for the win-win, and we’re proud to say that 75% of our closed deals now include a seller-paid buydown credit! If you’re curious and would like to talk to a broker about how seller buydowns can benefit you, contact a member of our team today.