Navigating Seller Paid Mortgage Rate Buy Downs

Navigating Seller Paid Mortgage Rate Buy DownsAs mortgage rates remain higher than most people would like, several homebuyers are looking for ways to save on the cost of a Punta Gorda home. In some cases, buyers seek the opportunity to take advantage of a mortgage rate buy-down. Right now some sellers are advertising the help of a mortgage rate buydown to help attract buyers to their home. 

A mortgage rate buydown is a great asset. It can save a homebuyer more money on the purchase of a home than lowering the purchase price. It can benefit a home seller as well by paying out less money using the profit from the home sale than agreeing to take a lower offer. 

How Rate Buy Downs Work

Seller-paid buydowns work as a concession in the home purchase contract. They reduce the homebuyer's mortgage interest rate. This can be done in the form of a rate buydown that is effective for the life of the loan or for a specified time period at the beginning of the loan. 

There has been a large number of new home builders offering mortgage rate buydowns as incentives to home buyers. A report from May 2024 produced by the National Association of Home Builders found that around 60% of home builders are offering rate incentives. 

Types of Rate Buydowns

Permanent Buydown

A permanent buydown means that the mortgage rate on the home loan will be reduced for the entire life of the loan. This is done through the home seller paying a portion of the buyer's closing costs used for mortgage discount points. Every discount point purchased on a mortgage loan is equal to a quarter or 0.25% of a point. This costs one percent of the total loan amount. For example, if you purchase a $250,000 home in Punta Gorda with a 20% down payment this lowers the mortgage to $200,000. This means each point would cost $2,000. 

Temporary Buy Down

Another option for a rate buy-down is a temporary buy-down. This means that the interest rate is lowered for a set period at the beginning of the loan. This works when a seller pays what the loan holder would save in mortgage payments. It is like pre-paid interest made by the seller on the buyer's behalf. 

Vickie Davies of Knieper Team Real Estate shares the details of a Temporary rate buy down:

"A temporary buy-down is paid for by a homebuilder or someone selling a home in closing costs that are equal to what the buyer would be saving on their monthly payments at the beginning of their loan. The seller of the home puts the money into a custodial account at closing and the loan servicer draws from that account every month to fill in the difference between the agreed-upon loan payment and the full loan payment at the normal interest rate. "

The most common temporary rate buy-downs offer a lowered interest rate for the first one or two years of the mortgage loan. With each added year of a lower interest rate at the beginning of a mortgage loan, the rate increases to meet the eventual current offered mortgage rate for the life of the loan. This is a more beneficial option for buyers who plan to sell their home or refinance their home before the normal mortgage rate kicks back in. However, it is never advised to take a loan you can't afford with thoughts of being able to refinance. Or to purchase a home and sell it within five years.  

Should You Ask for a Rate Buydown?

Rate buydowns can be beneficial to a home buyer, but they may not always be the best choice to save money on a home purchase. The money paid to help a buyer gain a better mortgage interest rate might be better utilized to help with closing costs. Or they may be better utilized to make repairs to the home. It is always best to discuss your options with a financial advisor and use the help of your real estate agents' expert negotiation tactics to win the best purchase contract for you.

If you are purchasing a home in Punta Gorda, I am here to help. Whether you are looking for a canal home near the water to house a boat, or a sprawling lot of land with several acres near the head of the Peace River. Contact me any time with any Punta Gorda real estate needs, for both buying and selling homes. 

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