Homes: Slow-market savings - the 'buy-down'

NEW YORK (CNNMoney.com) -- As the housing market slows, big builders and developers are stepping up concessions and incentives to buyers - now small-time individuals are doing it too.

One such incentive is the buy-down, in which sellers pay up-front payments to reduce buyers' mortgage rates.

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Buy-downs are popular with developers because they enable the builders to offer savings without actually lowering their list prices, which they hate to do because the lowered price becomes the new benchmark.

One such buy-down is called a "3-2-1," because it lowers buyers' mortgage rates by 3 percentage points during the first year; 2 points the next; and 1 point the third. In the fourth year and ever after, home buyers make the full payment themselves.

"People think that the price is what sells," says Earl Niemoth, founder of Real Estate on the Internet, a Web-based broker in Florida. "But reducing the price won't help very much. Terms are what sells."

In Niemoth's buy-down plan, sellers pay down the first two years of interest. Buyers save 28 percent of their payment the first year, and 14 percent the second.

He worked out the arithmetic for a client recently. The house cost $224,900. With a 20 percent down payment, the mortgage principal would be $179,920 and the monthly mortgage payment would be $1,049 a month, assuming a 30-year loan fixed at 7 percent.

The buy-down would lower that to $749 the first year and $900 the second year.

The incentive cost the seller $5,397.60 at closing.

Another form of buy-down provides less of a hit early on but lasts the life of the loan. According to Bob Moulton, a mortgage broker with Americana Mortgage on Long Island, sellers can pay 2 percent of the entire mortgage amount to lower the interest rate by half a percentage point.

It costs the seller, then, $5,000 to bring a mortgage rate down from, says 6.5 percent to 6 percent on a $250,000 mortgage. That saves the buyer $81 a month on a 30-year fixed but buyers realize that same savings every month for as long as they own the home or have a mortgage. Over 30 years that adds up to nearly $30,000.

According to Julie McWorter, an agent with the ERA Davis and Linn brokerage in Jacksonville, the biggest benefit for sellers who offer this kind of deal is the big boost to buyer interest for properties. "It really increases your showings," she says.

According to Nancy Alperin, a broker with Maxwell Realty in Philadelphia, many buyers prefer the savings in the early years of the mortgage rather than spreading it out over the lifetime of the mortgage. She represents some properties that offer buyers a five-year, buy-down plan: They would have a rate of 3.5 percent the first year, 4.5 percent the second, 5.5 percent the third and 6.5 percent the fourth and fifth.

"Buyers want the savings now," she says. "Everybody buys furniture and redecorates the first few years."

Many buyers are also not planning to stay in the house very long. Their jobs may require them to relocate, they hope to trade up to a better house or they plan to downsize in a few years. Getting the savings early on makes much better financial sense for these buyers.

Niemoth says mortgage buy-downs have been around a long time. He first used the technique more than 20 years ago in Chicago, where he was trying, without much success, to market luxury condos.

"They cost $90,000 for a two bed, two bath in an upscale pre-war building, shows you how long ago this was," he says. "Interest rates were 16, 17, 18 percent back then. I put an ad in the paper offering to pay 8 percentage points of the loan for two years. I got 76 calls the first day. I couldn't renovate those condos fast enough."

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