I was curious to understand the math on what the benefit to a seller would be in paying down the interest rate on a buyer's mortgage.
Interest Rate Buy Down Example
We had made an offer to purchase a property and the buyer and seller were at an impasse.
Buyer offered to buy a property for $1,550,000.
Seller Countered at $1,650,000. At this point neither side was willing to budge.
I had spoken with a lender a week ago who had been explaining the benefit of a interest rate buy down. I wanted to know how the numbers would work in this example.
First I needed to know what today's rate was. The bank was offering them a rate of 7.125% but gave them a 0.75% reduction in the rate if they transferred over $1M to the bank, which they were planning to. So the rate they were getting was 6.375%.
With 20% down payment, this made their monthly mortgage $7,736 but what we wanted to compare this against was their estimated total payment, that is, their PITIH (Principle, Interest, Taxes, Insurance and HOA) which would be $9,790 (See column titled Buyer Offer).
Next I needed to how much lower the interest rate would need to be when purchasing at $1,650,000 to give them an approximately equivalent PITIH. Through trial and error the number ended up being 5.625% or 0.75% reduction in the interest rate was needed to make the monthly payments similar to the purchase at $1,550,000.
Now I asked their loan officer what would it cost to buy down their interest rate by 0.75% and the answer was 2.5% of the loan amount which is $33,000.
So if the seller agreed to pay $33,000 the monthly housing cost would be equivalent to the buyer. The seller would be paying $33,000 to get $100,000 more.