The Opposite of Buying Down Rates
Wait a second!
Isn’t borrowers’ goal to pay the lowest interest rate they can on their mortgage?
Yes, but — especially for first-time home Buyers — there’s the added consideration of closing costs.
On a $200,000 home, a typical amount would be 3%, or $6,000.
Conserving Cash
A popular strategy for cash-strapped first-time Buyers is to effectively finance their closing costs by overshooting the selling price by 3%, then asking the Seller to pay that amount towards the Buyer’s closing costs.
On a $206,000 offer with 3% seller-paid’s, the Seller nets $200,000, while the Buyer gets a nominally higher monthly payment (and principal balance), but doesn’t have to come up with another $6,000 cash.
Everyone’s happy, right?
Wrong.
Multiple Offer Scenario
Especially if the Buyer is putting down a scant 5% or less, and the home’s selling price got driven up in multiple offers, a higher purchase price (and bigger mortgage) increases the risk that the home won’t appraise.
Savvy Sellers know that if the Buyer’s financing falls through, the deal’s off, and they’re faced with either putting their home back on the market or renegotiating the sales price, several weeks after all those other interested Buyers have moved on.
See, “You mean, there’s no deal AND they get their earnest money back?!?”
Reducing Appraisal Risk
The solution?
For the Buyer to pay a higher mortgage rate, that effectively covers the Buyer’s 3% closing costs, and leaves the purchase price at $200k.
Got all that??
First-time Buyers might not — but a good agent and lender will.
P.S.: Thanks to Edina Mortgage’s Steve Mohabir for carefully laying out the above scenario — and executing it to perfection for a client in multiple offers last week (including managing to email me a pre-approval letter from a Wild hockey game on a Sunday night).