Oftentimes a seller concession can be a bigger benefit than a price reduction in your new home purchase. While it sounds great to pay less for your new home, making an at-list offer and requesting a seller concession may actually save you a lot more in the long run!
Here are the various ways a concession can be applied. An experience loan officer (That’s me!) will walk you through long and short-term benefits of each option:
- Fund a permanent rate buydown that guarantees lower principal and interest payments for the life of your loan.
- Fund a 2/1 temporary rate buydown to exponentially decrease monthly payments for first 24 months!
- Cover closing costs to minimize immediate out-of-pocket expense.
Option One: A permanent rate buydown is money used to buy better pricing for the life of your loan. This option makes sense if rates are not expected to drop any time soon OR if you know you won’t be in a position to refinance in the near future, because it locks you into a permanently lower interest rate which, of course, guarantees a lower monthly mortgage payment.
Option Two: A “2/1″ temporary buydown is not actually a buydown. Your note interest rate won’t change, but money provided by your seller (or your realtor, if they choose) gets funneled into your escrow account to be applied toward your payment each month. In the 2/1 example, if you qualify for a 6.5% interest rate, your payment the first 12 months will be based on a 4.5% interest rate, and for months 13-24 on a 5.5% interest rate. From the third year onward you”ll be at the 6.5% note rate. Two great things about this options are that it buys you time at a lower monthly payment while we wait for rates to (hopefully) continue their downward trend, and you’ll never lose this money! Since it’s stored in your escrow account, if it makes sense to refinance your mortgage before the two years is up, anything left over will be refunded to you! This is NOT the case with the permanent buydown outlined above. (NOTE: a 3/2/1 buydown is also available, but the cost of this is typically higher than any seller concession available).
Option Three: Since rates are projected to continue a downward trend, you may opt to simply accept today’s pricing, and utilize seller concessions to cover all or most of your closing costs so you can retain liquid assets. It’s much more comfortable to go into homeownership with ample liquid reserves.
Be sure to work with a professional who is taking the time to review all of your options, so you can make the most educated decision for you and your family.