Waiting for Interest Rates to Drop? A Seller-Paid Rate Buydown Could Be a Better Strategy
If interest rates are the reason you’ve put your home search on hold, you may have more options than you think.
I hear buyers say it all the time: “I’m just going to wait until rates come down.”
I understand why. Your interest rate has a major impact on your monthly mortgage payment. But waiting isn’t the only option. Instead of focusing solely on getting a seller to reduce the price of a home, buyers should also be asking another question: Could we negotiate seller concessions and use them toward a mortgage rate buydown?
Depending on your loan program, lender and the terms of the transaction, that strategy could potentially have a greater impact on your monthly payment than simply negotiating a lower purchase price.
Why New Construction Interest Rates Look So Attractive
There’s a reason buyers are paying attention to new construction right now.
Many builders are offering financing incentives, including below-market mortgage rates, closing-cost assistance and rate buydowns through preferred lenders.
Those incentives can make a new construction home look considerably more affordable on a monthly basis. But there can be tradeoffs.
Maybe you don’t want a brand-new home. Maybe you want an established neighborhood, mature landscaping, more space between homes or a larger lot.
Here in Coastal North Carolina, I see buyers comparing resale homes with new construction communities all the time. Sometimes the new construction payment wins their attention, even when the resale home is actually a better fit.
So why not explore whether we can negotiate some of that same financial advantage on a resale home?
Price Reduction vs. Rate Buydown
This is where buyers need to look beyond the sales price.
Let’s say a seller is willing to negotiate $10,000. One option might be reducing the purchase price by $10,000.
That sounds great, but if you’re financing the home, you aren't necessarily going to see a dramatic reduction in your monthly payment from that price change alone.
Another option may be negotiating seller concessions and, if permitted by your loan program and lender, applying some of those funds toward your closing costs or a mortgage rate buydown.
A lower interest rate is applied to the financed balance month after month, which means the impact on your monthly payment can potentially be much greater.
Same negotiation. Different use of the money. Potentially a much bigger impact on your monthly budget.
That is why I don't want my buyers looking only at the price of the house. I want them looking at the entire financial picture.
What Is a Mortgage Rate Buydown?
In simple terms, a mortgage rate buydown uses money paid upfront to reduce the interest rate on your mortgage. There are different types of buydowns.
A permanent rate buydown uses funds to obtain a lower interest rate for the life of the loan.
A temporary rate buydown, such as a 2-1 buydown, temporarily reduces the effective interest rate during the first years of the mortgage before it returns to the full note rate.
Which option makes sense depends on your finances, the loan program, the lender's requirements, the amount of seller concessions available and how long you expect to own the home or keep that particular mortgage.
This is where your real estate agent and lender should be working together.
A Lower Price Isn't Always the Best Deal
Real estate negotiations shouldn't automatically be: “Let's offer less.”
Sometimes that's absolutely the right move. Other times, I'd rather ask:
“How can we structure this offer so the buyer gets the most benefit from the money we're negotiating?”Maybe that's a price reduction. Maybe it's seller-paid closing costs. Maybe it's money toward a rate buydown. Maybe it's a combination.
The best answer depends on the buyer and the property. And in a market where some sellers are more willing to negotiate, buyers should understand all of the tools available to them.
Don't Assume You Have to Wait for Rates to Drop
Nobody can promise you where mortgage rates will be six months or a year from now.
If rates drop significantly, more buyers may jump back into the market. That could mean more competition for the same homes.
If you need or want to buy now, I would rather explore the numbers now than automatically tell you to sit on the sidelines and hope the market eventually gives you exactly what you want.
Let's look at the house.
Let's look at the asking price.
Let's look at what the seller may be willing to contribute.
Then let's get the lender involved and determine whether using seller concessions toward a rate buydown could make the numbers work better.
Your Agent Should Know These Strategies
I say this all the time: real estate agents do much more than open doors.
Your agent should understand how seller concessions work and know when it's time to bring your lender into the conversation about financing strategies.
We aren't the lender, and we shouldn't pretend to be.
But we absolutely should know enough to ask the right questions, negotiate strategically and put the right professionals together.And yes, I'm going to say it:
If your agent doesn't know anything about this, get a new agent!!
Buying a home is too expensive to have someone representing you who only knows how to negotiate the purchase price. There may be a better way to structure the deal. You just need someone willing to look for it.
Thinking About Buying in Coastal North Carolina?
If you're considering a home in Southport, Oak Island, Bolivia, Boiling Spring Lakes, Leland, Shallotte, Holden Beach, Ocean Isle Beach, Sunset Beach, Calabash or the surrounding Brunswick County area, let's talk about what you're trying to accomplish.
You may not need to wait for the “perfect” interest rate.
You may simply need a better strategy.
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