Why do a home sellers need to give buyers incentives in this hot seller market? They don’t.
But for sellers, an interest rate enticement could bring a better offer because the buyer can afford a higher sales price as his or her payment is subsidized.
After all, today’s buyers’ angst is about payments and affordability.
There are two types of buydowns: permanent and temporary.
Let’s start with the permanent buydown.
If rates are roughly 6.75% without points for a well-qualified buyer, paying 2.36 points (1 point is 1% of the loan amount) will land a 5.99% rate for a 30-year fixed rate. On $750,000 the principal and interest payment are $4,492 at 5.99%, respectively. The seller’s buydown cost would be $17,700. At 6.75%, the payment is $4,864. The payment is reduced by $372 (7.6%) per month with the buydown. The buyer can cherish a 30-year fixed rate under 6%.
Here’s the temporary buydown.
Say a resale homeseller or a builder has a home that’s been sitting on the market for too long but doesn’t want to reduce the listing price. A seller paying a 3-2-1 annual buydown might be in order, especially when the rate starts in the 3s.
Assume mortgage rates are at 6.75% on a 30-year fixed without points.
The way this buydown works is the first-year rate is 3.75%. Year two is 4.75%. Year three is 5.75% and years 4-30 are at the 6.75% note rate.
At 6.75% on say $750,000, the principal and interest payment are $4,864. On year one at 3.75% the P&I payment is $3,473. The difference between the two adds up to $1,391 per month x 12 months of payments totals $16,692.
Year two at 4.75% shows a P & I payment of $3,912. The difference between 4.75% and 6.75% rates are $952 x 12 months of payments totals $11,424.
Year three, at 5.75%, shows a P&I payment of $4,377. The difference between the 5.75% and 6.75% rates are $487 x 12 months of payments totals $5,844.
The total seller buydown credit for the 3 years is $33,960 plus .125% for the Fannie Mae buydown charge ($937) totaling $34,897
The mortgage servicer puts the buydown money into an escrow account,, releasing the subsidy each month in conjunction with the borrower’s separate house payment of $4,864.
The borrower must income qualify at the 6.75% note rate, but it sure helps to have lower payments for the first 3 years.
Regarding the permanent buydown example of 5.99%, the buyer qualifies at 5.99%.
Other versions of the buydown are 2-1 and 1-0. The 2-1 in this example would be 4.75% in year one, 5.75% in year two and then landing at 6.75% for years 3-30.
The 1-0 buydown would be 5.75% and then landing at 6.75% for the remaining 29 years.
If the borrower sells or refinances, the buydown funds go as a credit toward the mortgage balance owed. The borrower does not lose the funds.
For a permanent buydown, if the buyer sells or refinances, there is no borrower subsidy credit. That said, I’d still take the permanent buydown over the temporary buydown if I can grab a 5.99% rate in a 6.75% market.
Fannie Mae allows seller credit up to 3% of the sales price when putting less than 10% down, 6% credit when putting 10% to 25% down and up to 9% credit when the buyer is putting at least 25% down.
Freddie Mac rate news
The 30-year, fixed-rate averaged 6.94%, 8 basis points lower than last week. The 15-year, fixed-rate averaged 6.24%, 4 basis points lower than last week.
The Mortgage Bankers Association reported a 1.9% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $189 less than this week’spayment of $5,069.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875%, a 15-year conventional at5.75%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 6.25% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year-high balance conventional at 6.875% and a jumbo 30-year fixed at 6.875%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.
Eye-catcher loan program of the week: A 30-year VA at 5.875% with 1 point.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.