Nicole Fabiano Oertel’s client received a $4,000 closing credit from the sellers as a signing bonus when she purchased a property in Chicago’s Logan Square neighborhood. This credit was used to pay for a one-percentage-point buy-down on the buyer’s mortgage, as well as some of the buyer’s closing costs.
According to Fabiano Oertel, a broker with Compass, the seller’s credit reflects the current era. Sellers eager to conclude a deal may offer to pay a portion of the buyer’s interest rate upfront in cash. Buy-downs function through the borrower paying an up-front fee known as mortgage points.
The loan amount is multiplied by the point value per year. One mortgage point on a $300,000 house in the Chicago Metropolitan Area would cost $3,000. Rates may be higher, but Fabiano Oertel counters that there is much less competition now than there was a year ago.
You’re ahead of the competition because “rates have gone up, but if we educate you about them and show it’s maybe only a couple hundred dollar difference [monthly] or we do a rate buy-down, you’re ahead of the game.”
The buyer was able to reduce her mortgage payment by $300 per month for the first 12 months
Homebuyers benefit from buy-downs in two ways: Permanently and temporarily. Many temporary buy-downs last for at least a year, giving prospective buyers a chance to make a purchase now in the hopes of refinancing at a lower rate in the future when mortgage rates inevitably fall.
However, this strategy is not without risks, and not all agents will use it. There’s no assurance that rates will go down in the future; if they do, it might be more than a year before they take effect.
Compass broker Rafael Murillo stated, “I have been letting the mortgage lender take the lead on the mortgage rate buy downs.” To paraphrase, “I just don’t like the concept of urging my buyers to get into a scenario where they might be stretching themselves too thin in anticipation that interest rates will come down dramatically and that rate never comes.”
According to Fabiano Oertel, all mortgage holders can benefit from this technology, but first-time purchasers will find it especially helpful. Since many transactions in the luxury market are conducted entirely in cash, the impact is muted.
There will be an initial discount of one percent off the buyer’s interest rate as part of the transaction
Some lenders in Chicago, among others, provide borrowers with zero-down payment buy-down options during initial talks. RocketMortgage, a leading national mortgage provider, offers “inflation buster” 1-0 mortgage rate buy-downs at no cost to potential borrowers. There will be an initial discount of one percent off the buyer’s interest rate as part of the transaction.
The borrower can extend the period during which they can refinance at a reduced rate by purchasing additional time from RocketMortgage at the cost of 2-1. Although this arrangement is not being made available to borrowers for free like the 1-0 deal.
RocketMortgage has stated that borrowers can negotiate with a seller or agent to purchase points to lower the interest rate by 2% below the contract rate in the first year, and then by 1% below the contract rate in the second year, before the rate goes back up to the complete 5%.
According to Murillo, sellers and mortgage lenders are offering buy-downs to ease buyers into the current market. According to him, “Marry the mortgage, date the interest rate” has become an unofficial motto in the real estate and mortgage industries. Just wait for interest rates to drop and then refinance.
The market has changed since last year, but it’s not because your home is worth less now, according to Fabiano Oertel. “If you are reasonable with the price we list, you will likely get close to your asking price, and you will still get a fantastic value. The people who would pay an extra $50,000 or $100,000 aren’t going to buy from you.