Rate temporarily dropped by 2% at no cost to buyer

Mortgage broker: Liz Bayer, ProMortgage.

Property type: Single-family home in San Francisco’s Forest Knolls neighborhood.

Appraised value: $1.21 million.

Loan amount: $1.088 million.

Loan type: 30-year fixed.

Rate: 6.999%.

APR: 7.204%.

Backstory: I had made a presentation to a group of new Realtors and told them that it would be a smart idea to familiarize themselves with loan products that would help their buyers.

In particular, I discussed the underused Temporary Buy Down loan where their buyer could reduce their mortgage rate by two points in the first year of the loan term by negotiating a seller concession in their contract offer.

This got the attention of one of the Realtors. It is a great solution to buyers who want a lower rate initially at a less expensive cost than a permanent rate buy down. And it is a great profit saver for a seller whose house has not had any offers to go the concession route, rather than drop the price of their listing.

Soon after my presentation, the Realtor referred me a buyer who was interested in a property that had been on the market for more than 60 days. The buyer wanted to get pre-approved and take advantage of this rate reduction.

Although the buyer understood that the rate reduction of 2% is in the first year, he was confident that rates would drop in a year or two. He loved that the cost of the rate reduction was covered by the seller rather than out of his pocket.

I suggested to my new client and his Realtor that I prepare a spreadsheet to show the profit savings to the seller of the concession compared to dropping the price, and this was the ticket to getting the offer accepted, as it saved the seller profit dollars.

If the seller had dropped their price by the customary 5% to generate interest on the listing, the profit would drop more than $60,000. On the other hand, the seller concession only dropped their profit by $26,500.

And our buyer’s payment would reduce their first-year payments by more than $17,000 based on the temporary rate of 4.999% and in the second year would be savings of almost $9,000 based on the Year Two temporary rate of 5.999% (that is, if they don’t already refinance by then).

Although we went with a conventional loan, this buy down is also available on Jumbo, FHA and VA loan products.

Both my client and seller felt great about this suggestion. And both Realtors told me that they are definitely going to utilize this strategy on future transactions. I told them that I would be happy to help them with the spreadsheet presentation to help illustrate this to their respective clients.