Two people review a mortgage document.
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Buydowns, rate lock fees can be powerful negotiation tools 

In this high-interest rate, low-inventory environment, creative financing tactics can help agents and their clients seal the deal.

July 7, 2023
4 minutes

Key points:

  • Many buyers are struggling to make financing work, but seller-funded buydowns may be a solution that benefits all parties.
  • Buydowns, which require an upfront fee in exchange for a lower mortgage rate, have been popular with builders trying to get buyers into new homes.
  • A rate lock extension fee can also be negotiated with a seller when the deal is taking longer to close.

Mortgage rates — which reached their highest level of the year this week — aren't likely to plunge anytime soon, so it's time for buyers, sellers and agents to take a closer look at buydowns and rate lock fees.

Mortgage rate buydowns, which allow a buyer (or seller) to pay to reduce the interest rate on a loan, have been a popular tool for home builders for some time. As sales slowed in the second half of 2022, builders turned to buydowns and other incentives to entice buyers. And it seems to have worked: While existing home sales have remained sluggish, new home sales in May were up 20% compared to a year ago.

Homeowners, too, have been willing to make concessions to seal the deal. Funding a buydown or paying for a rate lock extension are two of the options available to sellers who want to move the sale forward. 

How buydowns work

A quick primer on buydowns: A borrower or seller can opt to pay a set amount to lower the interest rate on a mortgage, either temporarily or for the life of the loan. Common options include 2-1 and 3-2-1 buydowns, which lower the interest rate by a set increment for a period of two to three years.

Let's say the current interest rate is 6.75%. In a 2-1 buydown, the borrower would pay 4.75% the first year — two points below the current rate — 5.75% the second year, and the full interest rate going forward. A 3-2-1 buydown adds an additional year and an extra point reduction the first year (e.g., 3.75%, 4.75% and 5.75% each year before the full rate kicks in).

Creative financing as a negotiating tool

Financing negotiation tactics were the topic of discussion in a recent CoreLogic Core Conversations podcast between vice president Maiclaire Bolton Smith and the company's principal economist, Molly Boesel.

Boesel noted that builders have led the way when it comes to buydowns, with three-quarters of them offering this option, but the tactic is "increasing in popularity" among buyers and sellers of existing homes as well. 

"If a seller realizes that this deal might fall through and then they need to look for a new buyer … they could be pretty motivated," said Boesel. "And when you have the seller offering to pay for the buydown, it becomes a much easier decision for you as the buyer, especially if they're not raising the price," she added.

Bolton Smith pointed to her personal experience as a recent buyer. She was preparing to make an offer on a home that had been on the market for a while, and her agent approached the listing agent to discuss the price. The listing agent said if Bolton Smith increased her offer slightly, the seller would buy down the interest rate. 

"So then we did the math on what the monthly payment would be for a higher price point but a lower interest rate. And it worked out exactly the same. The difference was more at closing, which we weren't really paying — they [the sellers] were paying, because they were buying down," she noted. 

"It was a very interesting negotiation tactic that I didn't even know existed," added Bolton Smith.

Buydowns aren't just good for buyers. In some situations, offering to pay for a buydown on a $500,000 home could mean more money for the seller in the end compared to knocking off $20,000 and looking for another buyer.

Rate lock fees also on the table

Most mortgage loan approvals come with a rate lock, but it doesn't last forever. Deals can fall through, and the current lack of inventory has only made it more challenging to find and quickly close on a home. But extending a rate lock can be costly. 

In Bolton Smith's case, she needed to extend her rate lock more than once, which would mean a series of increasing fees. Once again, she found that the sellers were open to covering the cost. "We did some negotiating, and the sellers, or even the agents, were offering to pay the extension to keep this deal going because they thought we would walk away from it if we couldn't get the interest rate that we had locked in."

Many buyers and sellers, like Bolton Smith, are not aware of all their financing options, and they rely on their agents for guidance. In fact, a recent survey found that buyers are more likely to turn to real estate agents over other sources for information about financing. 

Agents who are knowledgeable about buydowns, rate lock extensions and other financing options can give their buyer and seller clients more tools to close a sale — which is a win for everyone involved.

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