EP 96: What is a 2:1 Buy Down? With Guest, Bill Payne

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Yes. Hi, I’m Erin Spencer.

And I’m Stacy Smith.

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Welcome, everyone to another episode of Between Two Brokers. Lucky for you guys guess what time it is. It’s Schmoopy time. Dear listener, thank you so much for writing in. Don’t forget to write all of your questions into Podcasts@Smithspencer.com. Here’s today’s question. Dear Schmoopy, I keep hearing about this two one buy down. I see it offered on different listings, and I don’t really understand what it means. I have a listing that is getting no activity. Should I offer a two one buy down on this listing to help drum up some business? Schmoopy! Take it away. Oh, wait. How convenient. This is actually the perfect question for our mortgage correspondent, Bill Payne with First Home Mortgage, who just happens to be sitting next to us right now.
He took the red eye in from Nashville to answer your question.

I sure did.

He flew in just for you listener. So Schmoopy and I will definitely chime in with our thoughts. But we’ve got to start with the expert because he knows way more than we do. So Bill, tell us what this two one buy down is and should our listener offer it on her listing.

Okay, so two one buy down. Let’s just say the going interest rate is 7%. So the two stands for how much the interest rate will drop the very first year of payments. So from 7% goes to 5%. For the first 12 months, the buyer is paying at a 5% rate, then the one designates what the interest rate is the second year then becomes 6%. And then the third year and thereafter, for the remaining life of the loan, it’s at 7%. So it’s a nice incentive, it decreases the monthly mortgage payment for the buyer. However, it’s pretty costly for the seller, we’re talking about thousands of dollars that they’ll have to pay, because the seller or whoever’s offering the incentive, has to make up for that difference in the principal payment for the change in the interest rate.

So they’re buying down the rate, the more expensive the property is and the higher the mortgage is, the more expensive that buy down fee is going to be, correct?

Exactly right. It’s not cheap.

Let’s give a shout out to one of our partners, Bill Payne with First Home Mortgage, our number one mortgage guy who’s never let us down and 18 years is that why is number one. That’s why he’s number one, he makes us look good. Our clients always have a seamless deal. He’s so good at communication.
He has the best team too.

He definitely does. He’s accessible and available to explain things thoroughly and he’s so patient with our clients.
And quick to respond because this is a fast moving business.

So whether you are a buyer seller or real estate agent in town, if you haven’t called bill paying for your mortgage needs, you are missing out people.
Bill Payne with First Home Mortgage.

Call today.

Okay.

And the lender is still going to make the same amount of interest. It’s just they’re just making it up front rather than over the two years.

That’s exactly right.

They’ve got to make the mortgage whole.

Okay. And does a mortgage lender make extra money by selling this type of product?

No, this is purely an incentive for for sellers and for buyers.

Okay.

And the benefit for the buyer is not only the lower interest rate for two years, but it can tie them over until we get to a lower interest rate and they can refinance.

Exactly right.

But if let’s say rates are 7% right now, and then interest rates, let’s just say for example, they dropped like 4% next year, you would go ahead and refinance and then that buy down that the seller pays would have been kind of worthless. Kind of money lost, right?

You’re exactly right.

Right. So why would you have your seller offer this?

A lot of builders offer this incentive and that’s to keep the price points high.

So they are in a development and they are going to have several more lots to sell next year and they’ve got to have this house sell for $900,000 because the house next to it, they want to sell for more in the future. Got it.

That’s exactly right. If it’s resell for instance, this will just attract buyers because hey, they can pay less each month for the mortgage, but still get the same price point of home. It’s just really costly for the sellers to pay for that incentive. So the sellers, are not going to net as much on the transaction.

Or you raise the purchase price so that it’s a wash, because I just did one for my buyer, we offered full price, which was $283,000. And after looking at the numbers, and the interest rate had gone up, the lender wanted to pursue this two one buy down, and it was going to be about $8,000 worth of upfront interest paid by the seller. So we had to increase the contract price to $291,000. Luckily, it did appraise, so the seller is getting $8,000 more on the contract, they’re just giving it back to the buyer at closing.

To your point, the only thing that could mess this up is the appraised value. As long as that comes in, you’re good to go, everybody’s happy. So that’s a perfect example for the use of it. Especially at that price point, at that monthly payment the buyers are probably very sensitive to their monthly payment.

So at the lower price points, I can see how it makes sense. And what Erin and Bill are talking about is basically the buyer is financing their own buy down, so the seller isn’t actually paying for it. But when you do that, and you bump up the purchase price. I mean, sometimes we do this with when with seller paid closing costs, you just have to be very sensitive to the appraisal and if it’s in the case of a condo, and it’s an apples to apples, you need to make sure that properties have sold for that price or more in the past. So the appraisal is not going to be an issue.

Yes, in the addendum we wrote that this buy down was contingent upon the property appraising for the new contract price. Because if it didn’t, then that is the buyer’s problem. And can she still qualify for financing at the full interest rate? Yeah, it all worked out. For us.

That is good. So I thought that this was all bullshit until you told me about that scenario.

That’s why we’re here we all learn from each other.

Yeah, so if the buyer’s going to finance it, then I think it makes sense. Otherwise, I think it’s just smoke and mirrors because I think a lot of agents are just not really educated about what it is because they don’t use Bill Payne. And, you know, I’m all about keeping things simple and this kind of complicates things and it’s like this incentive and yes, it can have value but sometimes I think, you know, if the agent doesn’t understand, certainly their seller doesn’t understand what they’re offering. I just think the best thing to do generally is to lower a purchase price like if you’re not selling anything and you’re not getting any traction on your listing, I would lower the purchase price I think you could mention a two one buy down but you got to make sure that you really have explained to your seller what they would be willing to offer and then you can include that scenario so if you do get an offer you could tell the agent just like Erin did, the seller will offer a two one by down if the amount is financed into the property so you’re gonna have to offer let’s say it’s gonna cost $10,000, $10,000 over our list price in order to get this deal done.

And if it doesn’t appraise no buy down.

Aren’t we so glad that Bill is here. Bill, do you have anything else to add about this two one buy down?

Y’all have mastered it.

No, it’s because we have you, the mortgage master.

And just to be clear, Bill lives in Charleston. He just took the red eye in because he’s cool dad and took his kids to a concert in Nashville.

That’s exactly right.

Bill’s the best.

I try!

All right, thank you so much to our mortgage correspondent, Bill, for showing up to answer this question. Thank you, dear listener for writing into Podcasts@smithspencer.com. Don’t forget to rate review and subscribe. Don’t forget to follow us on Instagram a @SmithSpencerRealEstate and @BetweenTwoBrokers and Bill what’s your Instagram?

@BillWPayne.