Sellers can help buyers with permanent fixed rate buydown to 5.99%

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | June 5, 2024

Article originally posted in Orange County Register on May 25, 2024.

Why do 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. At $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’s payment 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 at 5.75%, 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. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.