What Is An Interest Rate Buy Down?
A mortgage interest rate buy down is a way to temporarily reduce the high interest rates for temporary time period only.
Say a lender approved a buyer at a 7% rate on a 30 year fixed loan, the buyer could actually pay 4, 5 or 6% for the first few years before the rate adjusts back to the original 7%.
How Does an Interest Rate Buy Down Work?
The seller of a home, at close of escrow, PAYS DOWN the buyers interest rate, using their own money.
How To Calculate The Interest Rate Buy Down?
In real estate, there’s something called points.
One Point, equals 1% of the loan amount.
In example, a buyer is putting down 10% on a $500,000 purchase price.
10% off $500,000 equals $50,000.
This would mean, that the buyers loan is $450,000.
Let’s just say the buyer got a 7% interest rate from their lender.
If the seller was to buy down ONE POINT for the buyer, it would actually mean the seller would buy down 1% of $450,000, which would equal $4,500.
This would drop the buyers interest rate from 7% to 6%.
Typically, a buy down would be for 12 months or more.
If the example above was to be used for 12 months, it would mean that the seller bought down $375 off the buyers monthly mortgage payment, for one year ($4,500 divided by 12 = $375).
How To Structure An Interest Rate Buy Down On An Offer?
First, you would have to get pre-approved by a lender to understand what their interest rate is going to look like for your specific loan program.
After that, you would have to work with a strong buyer’s agent who is familiar with interest rate buy-downs and can not only add the request in proper writing into the offer, but also negotiate and convince the seller and the seller’s agent to agree to buy-down your interest rate for a certain period of time.
Is There A Limit To How Many Points I Can Buy Down?
No, there is no pre-set limit. However, not every lender would agree to have the rate bought down. Interest Rate Buy Downs are “Lender Specific”.
However, generally speaking sellers may agree to pay down 1 to 3 points.
Can I Ask For An Interest Rate Buy Down On Every Offer?
It can be.
However, this is an acquisition strategy that is market specific.
Just like anything else in real estate.
If you are in a seller’s market, it is very unlikely that you as a buyer could ask for very many things from a seller.
If you are in a buyer’s market, it is very likely that you could ask the seller for things like an interest rate buy down or seller paid closing costs, repairs, etc’.
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