What’s Better: Mortgage Buydown or Price Cut?

A mortgage buydown is when the interest rate on your home loan is lowered in exchange for an upfront payment, often made by a seller or builder concession. The lowering of the interest rate will reduce your monthly mortgage payments. It’s a way to make home buying more affordable, especially when interest rates are creeping higher.

When negotiating a home purchase, many buyers zero in on one thing: price. But here’s a financial truth that can save you thousands. Sometimes the better deal isn’t a lower purchase price, but a lower interest rate. Take a look at this example:

Example 1: Let’s say you’re eyeing a $400,000 home and have 20% to put down. The seller offers you one of two options:

• Option 1: A $3,200 price reduction

• Option 2: A seller-paid buydown that lowers your 30-year fixed mortgage rate from 7.00% to 6.75%

At first glance, $3,200 off the price might sound appealing. But if you do the math, the mortgage buydown actually lowers the monthly payment more than the price reduction, AND can potentially lower the cost of the loan over time.

Savvy buyers should always ask the lender to work out both scenarios to see actual numbers. The right mortgage strategy can turn seller generosity into lasting savings.

The bottom line

In a market where sellers are willing to offer concessions, smart buyers don’t just ask for a discount, they ask for financial leverage. A mortgage buydown can be a smart way to lower monthly payments and make a home more affordable, especially in a high interest rate environment. It stretches your budget without needing to negotiate a lower purchase price.

For sellers, offering a buydown can be a powerful incentive that helps attract serious buyers without reducing the home’s value. In a competitive market, it’s a win-win strategy that keeps deals moving and both parties satisfied.

By Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

by Dan Krell © 2013
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Self defeating attitudes can interfere with your negotiating tactics; so get out of the way and negotiate to win.

What seems like many years ago, I read a book titled “Get Out of Your Own Way: Overcoming Self-Defeating Behavior” by Mark Goulston and Philip Goldberg. If you don’t get the gist of the book by its title, the book describes how people can become obstacles to their own success. And although the book was about personal growth, the premise can apply to self defeating attitudes brought forward during negotiating a real estate transaction.

Obviously, the purpose to entering into a real estate transaction is to either buy or sell a home. However, buyers and/or sellers can sometimes become obstacles in their own path to success; they may lose sight of the bigger picture and can make poor decisions – especially in negotiating price, repairs, and other issues that may pop up throughout the process. For example, a home buyer who seeks a low priced bargain may become frustrated wondering why he is constantly outbid; while the home seller who insists on an unsupported high price might become disappointed when there are no offers.

It is common knowledge that “the first rule” of negotiation is to not be emotional. However, many decisions about buying and selling a home are often based on emotion; additionally, expectation and anticipation often influence home buyers and sellers. If emotions take over, the larger goal is often lost to a narrow focus on seemingly insignificant and petty matters.

Get out of your way by sticking to the facts. Armed with data and facts, there is less conjecture and you are more likely to be persuasive in your arguments. Additionally, concentrating on facts can also help you stay focused on the larger picture of buying or selling your home. For example, when pricing or making offers – use recent neighborhood comps and look for data driven market sales trends (rather than relying on what you hear on the news). Looking at all the facts can also help negotiate other items, such as home inspection repairs; having contractor estimates may assist in resolving an impasse.

Sometimes buyers and sellers go into a transaction with a “win-lose” attitude, where they expect that their position is always correct. Being “aggressive” towards your counterparts may seem the best way to get what you want; however, fighting for an uncompromising position may lead to all parties becoming inflexible and a transaction that does not close. In fact, being forceful and antagonistic about your offer may make others become ill tempered and even possibly hostile to further negotiation.

One of the definitive texts on warfare, “The Art of War” by Sun Tzu, has also been a guiding resource for top negotiators. “The Art of War” doesn’t talk about going to the enemy and forcing them “to eat steel.” Rather, it is a thoughtful treatise on dealing with people. The upshot is that the best way to “win” is to prevent war through positioning, data, and understanding of the counterpart. In other words, negotiating to get your way may require positioning of the facts and being persuasive (rather than approaching the transaction with a take it or leave it attitude).

Negotiating tactics are an often misunderstood part of the real estate process. Hire a savvy real estate agent to assist you in collecting data and persuasively presenting your position. For a successful transaction – get out of your way!

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published the week of April 15, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.