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Interest Rate Buy Down's

erin • Jun 30, 2023

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I know! I am a REALTOR®, not a banker! And yet, I am often talking about interest rates.


Why?


Interest rates hold an unparalleled impact on the market. Interest costs are a notable power player for Buyer flexibility, as consequential as location, timing, and purchase price.

Check out this short summary from the National Association of REALTORS in June of 2023:


Mortgage rates continued to rise this week. According to Freddie Mac, the average rate on a 30-year fixed mortgage jumped to 6.79% from 6.39% in the first week of May. With rates closer to the 7% benchmark, nearly 5.5 million households continue to be priced out of the market compared to a year ago. Although there are fewer buyers, more than one-third of properties are sold above their list price due to limited inventory, especially of homes that first-time buyers can afford to buy.


However, a couple of government factors will likely help mortgage rates to come down in the following weeks. First, there is positive progress with the debt ceiling deal to prevent our country from a historic default. In the meantime, the Federal Reserve may pause its interest rate hikes later this month. Although these two factors do not directly affect mortgage rates, they affect the economy and eventually mortgage rates.

With mortgage rates directly affecting Buyer purchasing power, the chart above explores the impact of interest rates vs. lower purchase prices.


In example one, the buyer pays $1.525,000 to purchase a primary home with a market interest rate.

In example 3, the same buyer purchases the same property for a $25,000 purchase price discount and market interest.

By negotiating the seller down $25,000 in the purchase price, the buyer saves $1,596 (or less than 1%) annually. 


Example 2 is where the power is!


When the Seller participates in an interest rate buy-down, the Buyer could reduce their interest rate, translating to big savings; in Example 2, the Buyer saves just under $10,000 a year, or nearly 10% a year in principal and interest, although the purchase price hasn't shifted!


With that in mind, as a buyer, which would you rather work for? A lower purchase price or a lower interest rate?


On a totaly unrelated note, did you see the interest rate buy down opportunity offered on 6613 Blackwood in Bozeman?


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