Mortgage rates in America have reached a near two-month high of 6.43 percent, causing home loan applications to fall by 10 percent.
As a result, many potential buyers are feeling deterred from the property market.
However, experts suggest that buyers can still negotiate and gain leverage with a buydown deal.
A buydown involves a seller agreeing to pay a lump sum of money that is then used to reduce a buyer’s interest rate over a set period of time.
This can save buyers thousands of dollars off their loan repayments.
The Power of Negotiation for Buyers
After two years of a hot seller’s market, buyers now have more power to negotiate deals.
Consequently, many sellers are using the buydown tactic to attract buyers and ease their concerns over homeownership costs.
These negotiations are more likely to occur when a property has been on the market for a long time and the seller is struggling to find a buyer.
Types of Buydown Deals
The cost of the buydown is covered by the seller’s profits on the house sale, and deals are split into two types: permanent and temporary.
Temporary buydowns are more common and see sellers paying to reduce the mortgage rate in the first year or two after the sale.
After that, the homeowner is responsible for the full rate.
In contrast, a permanent buydown is much more lucrative for the buyer but more expensive for the seller.
It is when the rate is reduced for the entirety of the mortgage.
Common ways to structure the deal are into three-year, two-year, and one-year buydowns, referred to as 3-2-1, 2-1, and 1-0 deals, respectively.
Examples of Successful Buydown Deals
Loan expert Andrew Boyd, who runs comparison site Finty, says that a 2-1 buydown deal could save a buyer $627 in the first month on a 30-year mortgage for $500,000 at a 6.5 percent rate.
The example of a $700,000 house shows how a buyer can secure a mortgage with a 6 percent rate and a 2-1 buydown.
In the first year, they may only pay 4 percent on their mortgage before it is upped to 5 percent in the second year.
By the third year, the couple will return to the 6 percent rate.
In this scenario, the buyers saved $12,000 over two years.
Successful Negotiation Is Key
Buydowns require successful negotiation, and it is more likely that a deal will be struck on a house that has been on the market for some time or if the vendor is under pressure to sell.
Commentary
As mortgage rates continue to rise, homebuyers need to be creative in how they can save money.
Buydown deals offer an opportunity to negotiate lower interest rates, which can significantly decrease the monthly repayments on a mortgage.
Permanent buydowns can be more expensive for sellers, but they provide long-term savings for buyers.
Buyers should be cautious and patient, looking for deals that suit their financial situation.
It is also essential to understand that negotiations require a successful discussion and compromise between the parties involved.
By having this understanding, buyers can take advantage of the current market and save thousands of dollars on their mortgage.