real estate

Buy down points to get the deal done

Steve McLindenq_v2.gifDear Real Estate Adviser,
We have been trying to sell our home for several months and have not had any luck. I've been told that a possible selling point would be to offer to buy down points for the potential buyer. Is this a good idea?
-- Wondering

a_v2.gifDear Wondering,
Given your recent frustrations, this may be just the incentive offer you need to spur some action. In essence, the premise of buying down points is this: You are putting down more upfront, or "origination," money for the buyer to reduce the interest rate percentage over the term, or a portion of the term, of that buyer's mortgage.

For clarity's sake, here's a rough example of what's called a "permanent buy down" of points. Let's say your home is priced $500,000 and the buyer is looking at a 30-year loan for $450,000. You volunteer to buy down points from an interest rate of 7 percent to 6 percent for the buyer that will save the buyer about $40,000 over the life of the loan, while costing you about $20,000 to $25,000.

Though this is merely an example and can't account for all variables and future tax credits, you can still see how this could be beneficial to both parties. You, the seller, would get a higher selling price on your home while the buyer would save significantly on monthly mortgage payments and potentially on tax credits related to that early buy down.

There are also temporary buy downs of shorter-term buyer savings, such as the "2-1 buy down." Under this strategy, the rate is 2 points below market for the first year and 1 point below market the second year. In the "3-2-1 buy down," the rate drops three points from the market rate in the first year, by two points in the second year and by one in the third. Temps, in fact, seem to be more common than permanent buy downs. Once these temporary buy-down periods end, the interest rates returns to the level they would have been if there had there been no reductions.

In the days of the seller's market (remember those?), such seller point-paring typically wasn't necessary. The goal of most buy downs these days, besides their role as a financial incentive, is to get the initial interest rate down to a point where the buyer(s) can qualify for financing.

As an alternative to buying down points, sellers are regularly offering payment of closing costs, which can run up to $10,000 or more in many cases. Look into this as well. Make sure that your agent or someone else who is a number cruncher runs and reruns the vitals to determine which of these scenarios may work best for you and your buyer.

Happy point shaving!

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "Buying, selling a home" as the topic. Read more Real Estate Adviser columns and more stories about mortgages.

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