Higher rates combined with higher prices create a challenging market for buyers and
sellers. However, a particular form of seller credit, known as a seller-paid mortgage rate buydown, can improve the chances of a successful purchase/sale by benefiting both parties.

There are two types of rate buydowns, a Temporary Buydown (typically associated with
Agency-Conforming loans), and a Permanent Buydown (can be for either Conforming or
Jumbo loans).

Temporary Buydowns: Under this type of program the rate is reduced for the first
1-3 years of the loan. These programs are widely known as 3-2-1, 2-1 or 1 yr
Buydowns. While the borrowers must qualify at the base rate- the rate that will be
applicable at the end of the buydown period, the buyers will still benefit from
lower payments during the initial period.

The rate reduction is usually 1% per buydown term year. Thus, if the base rate was
7.5%, then on a 3-2-1 Buydown program, the rate the first year would be 4.5%,
5.5% the second year, 6.5% the third, returning to the base rate of 7.5% the fourth
year. A Temporary Buydown makes particular sense for the buyer if one assumes
that rates will be dropping in the next few years.

The seller contribution cost calculation is straightforward- it is the difference
between the total cumulative loan payments during the buydown period at the
reduced rate and the total payments that would have been made over the same
period at the base rate.

The advantage of a Temporary Buydown over a Permanent Buydown is that the
interest rate reduction per dollar spent is much greater, but it is over a much
shorter time (if the mortgage is retained for longer than the buydown period).

Permanent Buydowns: This option is not a special loan program. For a Permanent
Buydown the seller is simply granting a seller credit toward the buyer’s closing
costs to pay origination “points” on the mortgage to buydown the rate. One
“point” equals 1% of the loan amount, and typically buys the rate down by 0.25%.
However, as the points increase, the amount of rate reduction declines. Thus a 2-
point buydown might get you a 0.50% reduction, a 3-point buydown may only
deliver a 0.625% reduction in rate.

By temporarily or permanently reducing the housing expense for a buyer, a seller-paid rate buydown can be an attractive feature of a listing and may reduce any potential need for purchase price concessions to get a seller’s property under contract.

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