Over the past quarter of 2022, we have seen interest rates quickly climb, and they are predicted to continue to do so through the end of the year and potentially into 2023. When compared with historical data, they are still relatively average, but they are certainly not the rates we are accustomed to seeing over the past few years. This change is causing many to feel hesitant about buying AND selling. Let me assure you though, there is a some fabulous solution that most people are not even aware of. This is why it is CRITICAL to work with a real estate agent and loan officer who understand the options and work strategically on all deals.
We have TWO problems that need solving, and this strategy will accomplish BOTH.
- It ELIMINATES or reduces the BUYER’s fear of rising or higher than expected interest rates.
- It allows the SELLER to be highly competitive and keep more money in their pocket.
The solution is called a 2-1 or 3-2-1 Temporary Buydown Strategy, and it is defined as a process in which the seller provides a concession to the buyer so that the buyer can have a reduced interest rate for the first 2-3 years. For example, in a 2-1 Buy Down, the seller prepays interest worth 2% the first year and 1% the second year. So if the current interest rate is 7.5%, the buyer would experience a 5.5% interest rate in year 1, and a 6.5% interest rate in year 2. Amazing news! The goal of this is to allow the buyer to stair step into a higher payment and hopefully allow the buyer to refinance in the next few years one rates drop back again and lock in a lower rate for the long haul.
A 3-2-1 Buydown would work exactly the same way as above, but would provide a 3% reduction in year 1, 2% in year 2, and 1% in year 3.
This is a much better strategy for a seller than just reducing their price to attract a buyer. Reducing the purchase price does very little to help a buyer’s monthly payment and bottom line. Reducing a price by $20,000 (which many sellers have been doing!), results in just a nominal reduction in payment for a buyer, thus not really being an enticing feature. A $20,000 price reduction will result in a savings of only about $140/month for a buyer ($1,680/year).
Alternatively, on a $700,000 home with a 20% downpayment at a 7.5% interest rate, a 2-1 Buy Down would cost the seller roughly $13,344 and SAVE the buyer $736/month ($8,832/year) in year 1 and $376/month ($4,512/year) in year 2 . BOTH the buyer and seller get to keep more money in their pockets! A lot more!
This strategy is recommend as a seller concession over a long term fixed Buydown since most people will likely refinance in just a few years and not fully experience the long term benefit of a traditional Buydown.
Applying the strategy of a 3-2-1 or a 2-1 Buydown can help sellers and buyers both WIN in this higher interest environment. The seller avoids multiple price reductions, potentially losing 10s of thousands of dollars, while the buyer saves BIG in their first few years, until they can refinance.
Furthermore, an offer is much more likely to be accepted by a seller when a buyer employs this strategy as opposed to asking for a large price reduction.
Why aren’t more people using these Temporary Buydown Strategies, you ask? Simply put, people don’t know they exist since we’ve been living in a time of unprecedented low interest rates for the past several years, so get the word out! If you’re interested to know specifically how this strategy would work with your purchase or sale, just reach out. I’ll get one of my trusted lenders to work up numbers for your specific scenario.
Hi, there!
I’m Mindy. I specialize in taking the overwhelm out of buying and selling for busy, active families and turn it into a streamlined, exceptional, luxury experience. You deserve a real estate agent who takes the hassle and stress out of buying and selling and handles the details that matter.
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