Reprinted with permission from Pat Zaby at www.PatZaby.com
|
Better Than a Price Reduction |
A 2% reduction on the list price of a $225,000 home might not encourage any additional activity on the home but the same money spent might attract lots of buyers if it is applied to an interest rate buy-down. Of the five marketing factors that affect the sale of a home, most agents concentrate on price. While that will certainly cure a lot of what ails a listing, terms for the buyer is another alternative.
Assuming that the current market rate is 6.5%, a seller could prepay the interest so the buyer would make payments based on 4.5% on their mortgage for the first 12 months and 5.5% for the next 12 months. At the end of two years, the payments would be based on the note rate for the balance of the term which is usually 28 years.
It is a fixed rate mortgage so the buyer will know what the payments will ultimately be. It subsidizes the payments for two years that will allow the buyer to get into the home and get settled. In the example shown, the buyer’s payment is $227.73 less for the first year and $104.00 less the second year.
The seller prepays the interest at closing. The terms offered to the buyer makes the home more attractive and will cause more activity in the form of showings. This strategy may even help the home sell for more money.
|
Reduced Price |
2/1 Buy Down – $4,608.78 |
|||
|
Sales Price |
$220,400 |
|
|
225,000 |
|
Mortgage |
$198,360 |
|
|
202,500 |
|
Rate |
6.5 |
4.5 |
5.5 |
6.5 |
|
Payment |
$1,253.77 |
$1,026.04 |
$1,149.77 |
$1,2798.94 |
|
Monthly Savings |
|
$227.73 |
$104.00 |
|
Let’s say that you get your seller to agree to participate with $5,000 in financing incentives that the borrower can apply to the mortgage of their choice. In this example, the borrower would be getting a market rate loan but the first year’s payment would be based on a two-percent lower rate and the second year’s payment on a one-percent lower rate.
The borrower doesn’t have the risk associated with an adjustable rate mortgage but they do have lower payments for the first two years that will ease them into the new home while they get settled with their other expenses that always accompany a move.
