Getting a lower interest rate is bound to be a top priority for anyone looking to buy a home right now. As a real estate agent, arming yourself with the right information can help you respond helpfully to your client’s hesitations and close more deals. So, is it possible to get a lower interest rate in today’s market? With a mortgage buydown, there might be a way.
Why Is a Lower Interest Rate Important?
When your clients commit to buying a home, it’s easy for them to get stuck on one number: The sales price. Typically, the mortgage balance will be equal to the sales price minus whatever down payment the client pays (typically 20%). For instance, if a home sells for $600k and the client puts $120k down, the mortgage balance will be $480k. However, clients really need to think long-term, especially with today’s mortgage rates.
By the time a 15- or 30-year mortgage is over, the client will have paid far more than the original $480k they borrowed because the interest rate will cause that balance to grow larger continuously. The longer it takes to pay it off, the more their interest rate will cost them. That’s why getting a lower interest rate is such a big priority, especially with the average mortgage rate expected to be around 5% to 7% in 2023.
The good news is, there are a number of ways your clients can get a lower interest rate. First and foremost, having a good credit score poses less risk to the lender, which can bring their rate down. A larger down payment also reduces the lender’s risk and can score them a better deal. However, there’s another option to get a lower interest rate and it’s not talked about nearly enough; it’s known as a mortgage buydown.
What Is a Mortgage Buydown?
A mortgage buydown is an agreement in which the buyer, or someone on their behalf, can buy “points” to get a lower interest rate. Sellers and builders will sometimes agree to buy points on a buyer’s behalf as an incentive for purchasing a property. A buyer can also buy points for their own mortgage. Points are often called “discount points” or “mortgage points.”
Points need to be purchased at the time of closing. The cost of a point, along with how much each point reduces the interest rate of the loan, should be discussed with the lender in advance. You can explain mortgage points to your client by explaining it’s a one-time fee that will reduce their rate to a lower interest rate either temporarily or permanently.
Permanent vs. Temporary Mortgage Buydown
Lenders may offer a few different options for their mortgage buydown programs. For instance, your client may be given the choice of a permanent mortgage buydown that allows them to buy points to get a lower interest rate that will last for the life of the loan.
Alternatively, a temporary mortgage buydown allows your client to buy points to get a lower interest rate for a few years before it goes back up to the original rate. Temporary mortgage buydowns are often called “3-2-1 buydowns” or “2-1 buydowns,” which refers to the length of time the lower interest rate period lasts. For instance, with a 3-2-1 buydown, the first year has a 3% lower interest rate, the second has a 2% lower interest rate, the third has a 1% lower interest rate, and the fourth year and beyond has the original rate.
A temporary mortgage buydown may appeal to your clients for a number of reasons. If they expect interest rates to drop in the next 3-4 years and plan to refinance at that time, a temporary buydown may be all they need. Likewise, if they expect to sell their home or pay off their mortgage in the next 3-4 years, a temporary mortgage buydown makes better sense than a permanent one.
How Much Do Mortgage Points Cost?
The cost of a mortgage point is usually equal to 1% of the loan amount. If your client is borrowing $480k, the cost of a mortgage point would be about $4,800. However, a mortgage point will not reduce the interest rate by 1%. Generally, each point your client purchases will reduce the interest rate by 0.25%, but this can vary.
It’s worth noting that the cost of buying points for a temporary mortgage buydown is less than that of a permanent mortgage buydown since a temporary buydown doesn’t save the borrower as much money in interest over the life of the loan. To compare their options, make sure your client reviews the information in writing and runs the numbers.
When Is a Mortgage Buydown a Good Idea?
If your clients are trying to get a lower interest rate, telling them about the mortgage buydown options that might be available to them could be valuable. Some of the motivating factors behind buying points include:
- The client wants a lower interest rate so they can have a lower monthly mortgage payment.
- The client wants to lower their interest rate for a few years to buy time until they’re able to refinance at a new rate or term.
- The client wants to lower their interest rate for a few years until they sell the house or otherwise pay off the mortgage.
In the current climate, there are many good reasons to buy points since interest rates are so high. If your clients are on the fence, and maybe even considering waiting things out until rates drop, introducing them to the concept of a mortgage buydown can help them make an informed decision about whether it’s a good time to buy.
Considerations of a Mortgage Buydown
Your clients appreciate your willingness to show them the big picture. If a client is interested in a mortgage buydown, it’s a good idea to make sure they’re aware of the most common downsides and considerations that come along with it.
- A mortgage buydown requires additional money at the time of closing, but the buyer could ask the seller or builder to cover some or all of the costs.
- If your client’s lender has given them a particularly high interest rate, they should look to improve personal factors (like their credit score) before buying points.
- A mortgage buydown is always a numbers game. Your client needs to sit down and look at the breakeven point to make sure it fits their plan.
If you can offer your clients valuable information like this, imagine how much stronger your relationships will be. Now, the next step in growing your network and closing more deals is having the right tools on your side.
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