Being flexible by offering to buy down the mortgage rate when selling a house for sale by owner can be a great way to lead buyers to your door, but it must be done correctly to reap the benefits.
It's the old, "What's in it for ME?!" (The Buyer)
When interest rates are higher, this option may be more attractive, than when interest rates are very low.
Why would offering to buy down the mortgage rate be attractive to a buyer? Well, first let's look at some actual numbers.
Note: The following is based on Canadian numbers. The figures for a bank loan in the U.S.A. will be slightly different but not be a great deal.
Other countries may also be different depending how loans are calculated in your country.
If you sold your house for $275,000.00 and your buyer had a 25% down payment of $68,750.00, the loan amount would be $206,250,00.
If you did buy down the mortgage rate, bringing it down from 6% to 4% for 3 years, the buyer's payments would be lowered from $1,319.60 per month to $1,084.92 per month.
This would save the buyer, $234.68 per month for 3 years! That is a total of $8,448.48.
If you are looking for some other information about selling in a slow market, just select one of the thumbnail photo links below.
How Much will this Cost Me?
Yes, it will cost you. It will cost you, $10,700.00. Therefore, your $275,000.00 selling price leaves you with $264,300.00 net.
I know, the numbers don't match. (savings to the buyer vs. costs to you). This is mainly due to balance differences at the end of the term. The exact math is not important. What the costs to you personally is all that really matters, right?
But, here's the good news. In order for your competition to compete, or for you to match for that matter, you or your neighbor would have to lower the selling price to $226,093.00 for the buyer to have the same loan payments over that 3 year period.
Total price reduction? $48,907.00! Therefore, if this exact scenario happened, you would be $38,207.00 better off by using a buy down, vs. a price reduction.
What Buyer would be Your Target?
Before I answer that question, let's look at what car dealerships have done for many, many years. They advertise and sell us payments and interest rates!
You get the picture. You are selling to the Monthly Payment Buyer. The buyer has, as we used to say, a beer budget with champagne taste. They want the big house with all the goodies, but don't want the big payments.
In you ride, saddled on your white horse with an offer. I'll sell my house to you for $275,000.00 with your down payment of 25% and you will save $234.64 per month for the next 3 years!
Your first step is to go to your lender or a broker, to discuss your plans. Personally, I'd choose the broker. Why? It will give you more choices of lenders.
The exception would be should you be facing a loan payout penalty, by paying off the loan early. Then I would start by reading Mortgage Help Here
Want to know more about mortgage brokers? Go to What is a Mortgage Broker Here
The lender or broker, can then guide you from there and make suggestions. They can also give you a good idea what the costs involved would be if you do buy down the mortgage rate.
I would ask for the worst case situation. What I mean by that, is look at selling for full price, with minimum down payment. You then can look at how much it would cost for a buy down using different percentages and terms.
As an example, you could try buying down the rate by 1.5% points, for a 36-month term. You could look at 1%, for a 5- year term. Perhaps you could consider 2% points, for 30 months.
When the house is sold and you close on the property, you then could have the funds required to do the buy down sent from your lawyer to the lender, to buy down the rate.
The buyer is now happy because their payments are lower for a given period of time.
You are happy because your house is sold.
The lender is happy because they have the bank loan and they have the profit margin covered. Win, Win and win.
Don't Keep Secrets
If you decide to use the buy down as a buyer incentive, don't forget to Advertise the option. Advertise everywhere that you are promoting the sale of your house. This would include the internet, newspaper, flyers and yes your yard sign.
Looking for a premium for sale by owner website to advertise your buy down the mortgage rate option?
Please proceed to For Sale by Owner Sites to find the "best of the best".
Placing an ad that states that the interest rate is 4% for 3 years when the going rate is 6% for a 3-year mortgage, can be enticing, when you offer to buy down the mortgage rate.
Payments of just $xxx per month with 5% down payment can turn heads.
How about; Save over $10,000.00 in payments over the next 3 years or words to that effect.
You may want to add a rider stating, "some conditions apply."
The buyer may also have to qualify at the higher rate when they apply for the loan. The idea of a buy down the mortgage rate, is to give the buyer a break with lower payments for a set period of time. It is not so the buyer can qualify for a larger loan and then run into trouble later.
Many buyers either are almost certain, or at least feel, that 2, 3, or 5 years down the road, they will be making more money, have a better job, or just simply be better off financially. This makes your offer to buy down the mortgage rate more attractive in their eyes.
In other words, I can buy the house I want now and be comfortable with higher payments later.
If you would like to do some calculations of the costs of a buy down on your property, just go to the link below. This is a Canadian calculator, so if you are from the U.S.A., the numbers may vary slightly. You will get a ballpark figure that you may find helpful.
Look Before You Leap
Before you try to put everything in place, make sure that everything is legal where you live. Your broker, lender, or real estate lawyer, should be able to guide you along the way.
Full disclosure is necessary on your purchase and sales agreement.
DO NOT make this a cash back to buyer situation.
For More Information about Seller Incentives
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