Price Cut or Rate Buydown? The Math on a $320K Indy Home at 7.24%
Rates eased a little this week. Freddie Mac's weekly survey put the average 30-year fixed at 7.24% on October 29, down from 7.32% the week before. That's welcome news, but it's still more than a full point above a year ago, when the average was 6.17%.
The Fed also held its benchmark rate at 3.75% to 4% on October 28, and two officials actually voted for a hike. I wouldn't build your purchase plan around a quick drop in rates.
So the better question is how to make today's payment work. One of the most useful tools buyers have right now is the seller concession, and how you use it makes a big difference.
Why Sellers Are Open to Negotiating
Closed home sales in central Indiana fell 3.5% year over year in September to 2,549, the second straight monthly drop, according to MIBOR data. The median sale price still rose 1.3% to $320,000. Homes averaged 47 days on market, with 7,405 active listings.
Nationally, 20.8% of listings took a price cut in September, a record for that month according to Realtor.com.
Prices are holding, but sellers are feeling the time on market. That gives you room to ask for help.
The Setup
Let's use the central Indiana median: a $320,000 home, 5% down, and a 30-year fixed rate of 7.24%. That's a $304,000 loan and a principal and interest payment of about $2,072 a month, before taxes and insurance.
Now say the seller agrees to give up $10,000. Here are three ways to take it.
Option 1: Take $10,000 Off the Price
Your loan drops to $294,500.
Your payment drops to about $2,007, a savings of roughly $65 a month.
You bring about $500 less to closing for your down payment.
Over five years, that adds up to about $3,900 in payment savings.
This is what most buyers ask for by default, and it's the weakest of the three options for your monthly payment.
Option 2: Use $10,000 for a 2-1 Temporary Buydown
With a 2-1 buydown, the seller's money prepays part of your interest. Your rate is 2 points lower in year one and 1 point lower in year two.
Year 1 at 5.24%: about $1,677 a month, saving $395 a month.
Year 2 at 6.24%: about $1,870 a month, saving $202 a month.
Year 3 and beyond: back to about $2,072.
The buydown costs about $7,163, which leaves roughly $2,837 of the credit for your closing costs. It works well if you expect your income to grow or you plan to refinance if rates come down. Just make sure you can handle the full payment from day one, because if rates don't fall, your payment steps up in year three.
Option 3: Use $10,000 to Buy Down the Rate Permanently
Discount point pricing changes daily and varies by lender, so treat this one as an example. If your lender charged one point (1% of the loan) for every 0.25% off the rate, $10,000 buys about 3.3 points and gets you to roughly 6.42%.
Your payment drops to about $1,905 a month.
You save about $167 a month for as long as you keep the loan.
Over five years, that's about $10,000 in savings, roughly breaking even on the credit.
Permanent points make the most sense when you plan to keep the loan for a long time. If you refinance in two years, you paid for savings you never collected.
Which One Should You Pick?
Planning to stay put and keep the loan six years or more? Lean toward permanent points.
Expecting a raise or hoping to refinance in the next couple of years? A 2-1 buydown front-loads the savings.
Want the smallest loan balance and the least cash down? A price cut lowers both.
One more thing. Every loan program limits how much a seller can contribute, and your lender has to approve how the credit is used. Get your lender's actual point pricing in writing before we write the offer, and I'll lay your real numbers side by side.
The Takeaway
At 7.24%, a $10,000 seller credit used to buy down your rate can save you two to six times more per month than the same $10,000 off the price, at least in the early years. Before you ask for a price cut, ask what that money could do for your rate.
Looking at a home on the southside or anywhere around Indy and want me to run these numbers on that specific house? Call or text me at 317-629-0070.
Paul Linn | DeBoor Group | Brokered by Real Broker, LLC | 317-629-0070 | Paul@SoldByPaulLinn.com
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