You tell your real estate agent "I want to buy this house, how can I afford it?" It's the house of your dreams - the right number of bedrooms, a great kitchen, and a nice back yard. The problem: it's slightly out of your price range. What are your options?
One option you could choose that can help you afford to buy this particular house is to use the buy-down strategy.
The buy-down strategy is made up of two components. The first component is lowering the interest rate by paying points. One point is equal to 1% of the loan amount. Each lender usually has a matrix of rates and points charged. For example, the matrix might look like this:
8% 0 point
7.5% 1 point
7% 2 points
6.5% 3 points
6% 4 points
(rates presented are for illustration purposes only and are not a solicitation)
Paying more points up-front at the close of escrow means that you get a lower interest rate!
To implement part one of the buy-down strategy, the buyer would choose the lowest rate so that he would be able to afford to buy this house.
Part two of the buy-down strategy is to put language into the contract that requires the seller to pay these points as a credit toward non-recurring closing costs. Non-recurring closing costs are the fees that you pay only once at the closing table, and that do not get charged throughout the life of the loan. An example of a non-recurring closing cost is points!
Here is icing on the cake for the buyer: even though the seller credits for the points paid, the buyer may be allowed to deduct these points as prepaid interest (see Topic 504 from the IRS, and check with your professional tax preparer) in the year that the house was purchased! This could be a huge tax deduction for the buyer!
I have prepared a video example for you to see how this works. As you will see from this video, the buy-down strategy is a win-win for the seller and buyer. The seller opens the door to a larger pool of qualified buyers. The buyer is able to afford to buy the house he wants!
Do you need help structuring a loan, or getting a rate quote? Call me at (650) 222-0386, or e-mail me
Great ideas Phil. Thanks for sharing and I loved your video.
Posted by Lake and Lodge Realty LLC 6 months ago
I really like the points you outlined and the video. Thanks for the post!
Posted by Kathy Hyatt, CRS-ABR-GRI (Keyes Real Estate) 6 months ago
Anyone shopping for a home needs all of the explanations they can find and read... more knowledge speaks to a better educated buyer whether it's about the type of loan they are looking fo ror not... knowledge is power.
Posted by Judi Barrett Integrity Real Estate Services, 580-212-5946 6 months ago
Hi Phil--Good strategy, we started encouraging this a couple of years ago. Buyers loved the idea, sellers seemed a little challenged by it. Some deals actually ended up using it! Do you include the Truckee/Tahoe area? Napa? I'll add you to the database.
Posted by Tamara Perlman, Lake Tahoe Truckee CA Real Estate (Coldwell Banker) 6 months ago
Lake and Lodge Realty - thanks for the compliment!
Kathy - thanks for the ggod words!
Judi - You are absolutely right - knowledge is power!
Tamara - Yes I have seen sellers challenged by it, biut with a visual like this video I think it helps. Yes, I am licensed in California so I can help with loans in the areas mentioned.
Posted by Phil Caulfield Jumbo and FHA Mortgage Loans California (Pre-Approval, First Time Buyer, Fixed Rates) 6 months ago
What a great idea. I will remember that for my buyers!
Posted by Jerri McCombs (Keller Williams Realty Mtn Prtnrs) 6 months ago
Anyone shopping for a home needs all of the explanations they can find and read... more knowledge speaks to a better educated buyer whether it's about the type of loan they are looking fo ror not... knowledge is power.
Lake and Lodge Realty - thanks for the compliment!
Kathy - thanks for the ggod words!
Judi - You are absolutely right - knowledge is power!
Tamara - Yes I have seen sellers challenged by it, biut with a visual like this video I think it helps. Yes, I am licensed in California so I can help with loans in the areas mentioned.
What a great idea. I will remember that for my buyers!