Archive for Friday, March 9, 2007

Rate buydowns can set home apart

March 9, 2007

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Q: Home sales in my area are still a little slow, so my real estate agent has suggested that I offer to "buy down" the interest rate of a prospective buyer's mortgage. She says that buydowns can help make a property sell faster, but couldn't really explain to me in plain English how they work. Can you help?

A: Sure. Seller-paid rate buydowns are becoming more popular in areas where home sales haven't yet fully recovered, in part because they're a much cheaper alternative than drastically cutting a home's offering price.

A buydown involves three parties - the buyer, the seller and the bank that would finance the sales transaction. Under a typical "2/1" buydown, the seller would pay a fee to the bank so the buyer would get an interest rate that's two points below today's fixed interest rate in the first year of the loan and one point below today's rate in the second year.

In the third year and beyond, the buyer would begin paying the same fixed rate that the bank was offering when the deal first closed.

For example, many banks today are offering 30-year, fixed-rate loans at 6 percent. If a seller offered to pay for a 2/1 buydown, the buyer would pay a mere 4 percent rate in the first year of his mortgage and a 5 percent rate in the second year. The rate would then go to 6 percent (and stay there) for the rest of the loan's life.

Buyers like properties that are offered with a buydown because the lower rate in the early years of the loan saves them a lot of money by reducing their monthly payments. On a $200,000 mortgage, for instance, a buyer would save $225 each month in the first year and $109 a month in the second - for a total savings of $4,008.

Sellers who pay for a 2/1 buydown today are charged about 2 percent of the total loan amount.

So, on a $200,000 mortgage, the 2/1 would cost the seller about $4,000. That's a lot of money, but it's a far cheaper alternative than cutting their home's offering price by $10,000 or $20,000 to induce a sale.

Q: I enjoyed your recent column about weird real estate laws that homeowners are supposed to follow. But do those same laws also cover churches or temples?

A: Generally, yes. If state law says you can't do something in your own home, then you usually can't do it in your church, temple or another place of worship either.

There are some exceptions. For example, it's OK to put on a fake mustache to make people laugh at a party in your own home, but it's a crime to do so if you're in a church in Alabama. In Nebraska, the parents of a kid who burps during a sermon are subject to arrest. And in South Carolina, an antiquated law technically requires all male churchgoers to bring a rifle with them - to ward off Indian attacks.

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