Navigating Seller-Paid Mortgage Rate Buy Downs on a Columbus Home

As mortgage rates remain higher than what many buyers would love to see, some Columbus home sales are successfully moving forward with the help of seller concessions. One of the most helpful is the interest rate buydown. 

A seller-paid buy-down can help a Columbus home seller to peak the interest of potential Columbus homebuyers nervous about affording a home purchase. It can help homebuyers in Columbus to be more confident about purchasing a home that is truly within their budget. Often this strategy can help buyers to save a larger sum of money on monthly mortgage payments as compared to negotiating a lower purchase price for a home. It can also help a Columbus home seller to profit more from a home sale over reducing the list price.

Numbers showed that two out of five home sales had some sort of seller concessions during the first quarter of 2023 across the country. Though rate buy-downs can be promising and helpful they also do come with some risks and things to consider. Here are some good things to know about seller-paid mortgage rate by downs.

How they work

With a seller-paid mortgage rate buy down the home seller offers a concession that reduces the home buyer's mortgage interest rate. This could either be for the entire life of the loan or it could be for the first few years of the loan. It usually happens through a seller's contribution to the buyer's closing costs through discount points or through the seller paying for a temporary rate buy-down.

A rate buy down through money toward closing costs

Offering money toward closing costs is often used with a permanent rate buy-down. In this strategy, the home seller will pay a portion of the closing costs for the buyer to use toward mortgage discount points. Each mortgage discount point can reduce the interest rate of a mortgage by .25% each point also costs 1% of the total loan amount.

For example, if a mortgage loan was to lend $400,000 to a home buyer a mortgage point would cost $4000. Each .10 saves a buyer a significant sum on monthly mortgage payments and benefits significantly over the life of the loan. A buyer can save tens of thousands of dollars when paying the mortgage in full at the end of the loan term.

It is good to note that depending on the type of mortgage the homebuyer chooses to use there could be a limit as to how much a seller could help out with closing costs. Federal Housing Administration and USDA loans limit seller contributions to 6% of the total loan amount. VA mortgage loans will limit seller contributions to 4%. For conventional loans, this limit can vary based on the specific lender parameters and the size of the down payment.

How a temporary rate buy-down works

A temporary rate buy-down can lower a buyer's mortgage rate for the first couple of years of the loan. The cost of temporary buy-downs is equal to the amount that the buyer saves with the reduced interest rate over the entire period that the interest rate has been reduced. So in a way, it is like the seller is pre-paying interest to benefit the buyer for the first few years of homeownership.

In December 2022, 7.6% of mortgages funded through Freddie Mac had mortgage rate buy-downs. Since then the number of temporary rate buy-downs has declined but is still higher than in 2021 before mortgage rates began to spike again.

If you are a Columbus homebuyer and wondering which seller concession might be a better offer for you it is good to consider how long you plan to stay within this home you are about to purchase. For home buyers who are planning to move again within a few years a temporary rate buy-down may be the better option. It could also largely depend on how much money the home seller is willing to pay to help benefit the buyer with their mortgage.

Potential risks of rate buy-downs

Buying down a mortgage rate seems to be beneficial for buyers of forwarding home purchases and sellers being able to close on and finalize a home sale. But despite the obvious benefits, there are some risks. For example, if mortgage rates were to dramatically drop it could be more beneficial for a Columbus home buyer to negotiate a reduced purchase price and then refinance once mortgage rates have dropped. But this itself could also be a gamble. No one can accurately predict where mortgage rates will end up and how far they will fall. While it can be a decent strategy to have refinancing in the back of your mind it also may not be the best plan to rely on.

No one can exactly predict where mortgage rates will go and it is very hard to know if you will benefit from refinancing in the future. Financial experts believe this is a very minimal risk to take using a rate buydown. You may hear them say to only concentrate on the here and now and being able to truly and comfortably afford a home purchase in the present. Many financial experts would say go ahead and buy a home that you really need when you are in a strong financial position to purchase one instead of worrying about where the market is. Purchasing a home is always a solid investment no matter the market.

For more information on buying or selling a Columbus home please contact me. I can help you to successfully sell your home for the best profit or purchase a home that is truly within an affordable budget that you will love. I am highly knowledgeable in Columbus real estate and very dedicated to the best interests of my clients.