No one will deny that this buyer’s market has been a wild ride so far. The first thing that enters the heads of most buyers today, however, is how low a seller will go. Asking for terms instead of a lowball price, however, may just be the silver lining for some buyers whose main concern is cash out of pocket and lower monthly payments.
Let’s say you’re considering a home that is listed for $515,000 and your Realtor checks comparables in the area. Comparable homes similar in square footage, amenities, location and condition to the home you want reflect the market value to be around $495,000. You are eager to offer $465,000 -- a full $30,000 under market value -- just to see how motivated the seller really is. Amortized over a 30-year period, the $30,000 difference reflected in your monthly payment, however might just be enough to take your family of four to few movies per month along with the expensive concessions at the movie theater.
But if, say, you’re asking the seller for terms instead of price, keeping the offer price at or close to fair market value -- while asking for a seller-paid interest rate “buy-down” as well as requesting that the seller pay all of your non-recurring closing costs -- it can mean a huge reduction in your monthly payments for the first few years you own the house as well as significantly reduce your cash to close. The only things not covered by your down payment might be prepaid interest, taxes and insurance, or possibly extra fees collected up-front for HOA dues, if they apply. Check with your loan officer for any scenario you are considering, asking for a GFE (Good Faith Estimate) to see how this works.
What is a seller-paid buy-down? Just about any loan can literally be “bought down” to a lower temporary (or even permanent) payment. A 2-1 buy-down, for example, is temporary. This is where the seller (or builder) throws a slew of money at the loan to subsidize the payments for the first few years you own the house. The 2-1 element means that the applicable interest rate is reduced by 2% the first year of the loan and 1% the second year. For years 3 through 30, the mortgage loan will be at the original rate and terms quoted. While you have hole-in-the-pocket syndrome during the first few years as you redecorate or make improvements, your monthly payments are at their lowest. This lowered payment scenario makes sense for a lot of people. Of course, you could try to go for both price AND terms, but try not to set your heart on people taking that big a hit, even in a market like this.
Although the seller may at first wince at this idea, dealing with the terms instead of the price of the home can help to maintain higher values for the neighborhood. And as long as you intend to stay in the home while riding out this market, the actual price of the house may not be as important to you as your monthly payments and hanging on to more cash unless, of course, you intend to tap your home’s equity sooner rather than later – not a great idea right now.
The caveat here is to make sure whatever your payment can adjust to after the buy-down periods or fixed periods of your loan take place, always look at the worst-case payment scenario. No one has a crystal ball as to where equity will go for a while, so make sure that you can handle any payment your loan may require before jumping into it head first.
Dena Kouremetis is a veteran freelance real estate consumer journalist and California real estate broker. She may be reached by email at REritr@aol.com.
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