For the past few years, we’ve talked about higher mortgage rates as if they were strictly a buyer problem. I think we need to change that conversation.
When mortgage rates move higher, buyers don’t simply complain about the rate. They shop based on the monthly payment that rate creates. And when that payment gets too high, buyers lower their price range, negotiate harder…or simply don’t buy….That makes mortgage rates a seller problem too and with homes taking longer to sell across Metro Atlanta, sellers need to start thinking differently about how they use concessions.
Stop Thinking Price. Start Thinking Payment…
Let’s look at a $500,000 home with a buyer putting 5% down.
That gives us a base loan amount of $475,000.
At a 30-year fixed rate of 6.99%, the principal and interest payment is approximately:
$3,157 PER MONTH
Now suppose the seller is considering a $15,000 price reduction…Reducing the price from $500,000 to $485,000 with the same 5% down reduces the loan amount to approximately $460,750.
The new principal and interest payment would be approximately:
$3,062 PER MONTH…That’s a savings of only about: $95 PER MONTH…The seller gave up $15,000 in price and the buyer’s payment barely moved.
But what if we attack the payment instead of the price?
Enter the 2/1 Buydown
Instead of simply reducing the price, let’s keep the sales price at $500,000 and have the seller provide a contribution toward an allowable 2/1 temporary interest-rate buydown.
Assuming a permanent note rate of 6.99%, here’s what happens:
| Effective Rate | Principal & Interest | Monthly Savings | |
|---|---|---|---|
| Year 1 | 4.99% | $2,547 | $610/mo. |
| Year 2 | 5.99% | $2,845 | $312/mo. |
| Year 3–30 | 6.99% | $3,157 | — |
That’s approximately $7,320 of payment assistance during the first year alone and another $3,744 during Year 2.
Total estimated cost of the 2/1 buydown??? Approximately $11,064. Now think about that from a seller’s perspective.
You could potentially reduce your price by $15,000 and save the buyer roughly $95 per month…or…You could potentially use approximately $11,000 toward a properly structured 2/1 buydown and save that same buyer approximately: $610 PER MONTH DURING THE FIRST YEAR!!! That’s a difference buyers can actually feel.
Of course, taxes, homeowners insurance, mortgage insurance and HOA dues would be additional, and seller contributions and temporary buydowns must meet applicable loan-program and underwriting guidelines.
But, the bigger point remains…Mortgage Rates Have Become a Seller’s Problem…As marketing times increase, sellers have choices…You can keep reducing the price or you can ask a much better question: “How can I make my house more affordable to the buyer?”
Today’s seller isn’t just competing with the house down the street on granite countertops, square footage or price. They’re competing on monthly payment.
So before making that next $10,000 or $15,000 price reduction, have your Realtor and mortgage professional run the numbers. Because the smartest seller concession may not be the one that makes the price look better…It may be the one that makes the payment look better.
PAYMENT SELLS…Bank On It 😊
DC Aiken is Senior Vice President of Lending for CrossCountry Mortgage, NMLS#658790. For more insights, you can subscribe to his newsletter at dcaiken.com. The opinions expressed within this article may not reflect the opinions or views of CrossCountry Mortgage, LLC or its affiliates.
Illustrative Example Only: Based on a $500,000 purchase price, $475,000 loan amount, 5% down, 30-year fixed conventional loan, 6.990% interest rate, and 7.464% APR. Principal and interest payments with a seller-funded 2/1 buydown are $2,547 in year one, $2,845 in year two, and $3,157 thereafter. The contractual rate remains 6.990%. Payments exclude taxes, insurance, and mortgage insurance. Actual terms and seller contributions are subject to program guidelines and approval. Rates and terms may change. Not a commitment to lend.