The recent
introduction of lender-paid closing costs or lender-paid temporary buy
downs can give a savvy real estate agent powerful new sales tools which
can answer home buyer's objections to inadequate cash saved to purchase a
home or help in lowering the home buyer's initial payments for budgeting
or qualifying.
Lender-paid closing costs and temporary buy downs are the opposite of
paying a lender cash in the form of discount points to get a lower rate of
interest. The borrower pays the lender a higher interest rate over the
loan life, to have his closing costs paid for when he is short of cash. Or
if the borrower desires lower initial payments for budgeting or
qualifying, he can agree to pay the lender a higher interest rate to
obtain a 2-1 interest rate buy down. In both instances, the borrower is
trading a higher interest rate for cash that he does not possess or a
lower initial payment to make the home purchase easier.
Most of us are familiar with the way lenders quote a range of interest
rates and points. If the average interest rate on a 30 year fixed
mortgages is 7.5%, they would quote something like this: 7.5% and 0
points. This is what is called "par price." (similar to par in golf, the
standard by which the price or par is set.) They will also quote 7.25% and
1 point, 7.0% and 2 points, 6.75% and 3 points and so on.
When asking a lender to pay a borrower's closing cost, the lender charges
an interest rate that is over par. Lenders call this technique "over-par
pricing." Since 1 point is roughly equal to .25% in interest, the lender
would charge the borrower .25% higher interest rate for each closing point
paid by the lender on behalf of the borrower. Two points or $2,000 paid by
the lender would cost the borrower approximately .50% interest rate, or 8%
instead of the 7.5% par price. While the borrower ends up paying a
slightly higher payment, it allows him to purchase the home when short on
cash saved. The lender either has more money coming in to make up for the
cash expanded or they can sell the loan to an investor at a higher yield
and recover the closing costs which wa paid in behalf of the borrower.
A similar technique is now being employed when the home buyers needs help
in budgeting the house payment or needs help qualifying for the loan. The
buyer can agree to pay the lender .50%-.75% higher interest rate and
receive a 2-1 temporary buy down, which will lower the first and second
year's higher payments for the buyer. The catch is, the buyer/borrower
will pay 8% or 8.25% interest instead of 7.5%. However, the start rate
would be 2% below the 8% or 8.25%, giving the buyer lower initial payments
and a qualifying rate of either 6% or 6.25%, depending on the actual quote
charged. (A 2-1 buy down costs about 2.5 points. The lender needs to add
slightly more than .50% to the interest rate to cover the cost.)
While most buyer's would prefer the par price of 7.5%, many would pay the
higher rate to ge their closing costs paid or have lower initial payments.
This is simply one more bargaining chip that the real estate agent can use
to overcome financing objections, without asking the seller to pay these
expenses for the buyer. The seller can contribute seller concessions on
top of, or in lieu of the lender-paid closing costs or lender-paid buy
downs, as the seller concessions are separate from what the buyer is
paying. This presents even more options for the savvy real estate agent in
overcoming buyer's objections. Which in turn, will ultimately mean more
sales and commissions to those agents understanding the buyer's finance
options.
