When I was in the mortgage banking business years ago, I briefly worked in the joint venture department. The bank would partner with builders in housing tracts or condominiums. Rates had escalated, and the profit potential diminished. As an incentive, the bank offered an interest-rate buy-down.
For example, let’s assume an interest rate of 5.75%. A buydown can lower the rate by 2% for the first year to 3.75%. The second year the rate is reduced 1% or 4.75%. The rate is then fixed at 5.75% for the remaining term. However, a buydown is paid for in points. One point is 1% of the loan amount. The amount of the points (loan fee) is determined by the lender it’s approximately 2.5-3%.
Since interest rates have increased, an interest rate buy down is a tool a home seller can use in lieu of a price reduction.
