Home Sellers: Entice Buyers with 3-2-1 Buydown

With the real estate market beginning to slow down across the country, some sellers, real estate agents, and lenders are starting to rediscover some old methods of financing that were used to help move properties back in the 1980s, when interest rates soared well into the double digit range. One of the most effective techniques that's being revisited involves "buying down" a home's mortgage rate.

In essence, the buydown concept involves having a seller contribute money toward lowering a buyer's mortgage rate rather than reducing the overall sales price of a home. In the 1980s, the most popular type of buydown was called a 3-2-1, and here's how it works, using a typical 30-year mortgage as an example:

Once a sale has been consummated, and payments have begun coming, the seller begins to help the buyer make those payments. During the first year of the mortgage note, the seller will pay three percentage points of the interest rate. The second year, they will contribute two percent, and the third, one percent. Only after that initial three-year time period has elapsed will the buyer begin to pay the full rate on the loan.

Here's why a 3-2-1 buydown can be good for everyone involved in the transaction, including the buyer, seller, and real estate agent. Let's say that a seller has had a home on the market for a considerable length of time without any serious interest from buyers. That seller could choose to reduce the price by a substantial amount, but they could also agree to a 3-2-1 buydown, which essentially offers buyers a chance to have their first three years of mortgage payments at least partially subsidized.

Such a buydown program would allow a buyer who may be young, but with excellent prospects for increasing their income in the relatively near future, a chance to get into a home with substantially reduced payments, especially during the first year. For example, a $200,000 mortgage payment at 6.5 percent over thirty years would be about $1,200, principal and interest. With a 3-2-1 buydown, the seller's contribution for the first year would lower the buyer's payments to about $898, which is a substantial savings. The second year, the buyer’s payment would run about $1,114, and the third year would run about $1,013 a month. Only at the beginning of the fourth year would the buyer be responsible for the entire monthly payment.

Besides saving money each month on the mortgage payment, one huge benefit to the buyer (and the seller) is that the buyer needs less income to qualify to purchase the home. Many lenders use the lower payment in qualifying the buyer. This also helps buyers with debt-to-income ratios.

On the seller's side, the first year's subsidy would cost about $4,400. That amount would decrease to about $3,010 in year two, and $1,550 in year three. That $8,960 would cost a seller less than reducing a home by $10,000 in order to attract a buyer.

At the time of sale, the real estate agent benefits, too, because the sales price is higher than it would have been had the seller simply dropped the price. As a seller, negotiate this extra commission with your listing agent. Just because you signed a contract for a specific percentage doesn't always mean that you can't renegotiate at the time of sale. Besides, your promised commission was for a full price offer.

It's not a new home selling tool, but the 3-2-1 buydown can help you get that SOLD sign.