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The Power and Benefits of a Loan Interest Rate “Buy-Down”

Posted by Pete Sabine on December 11, 2007

In most real estate markets throughout the country, sellers are trying to cope with a slower moving market burdened with an over supply of competing homes for sale and weak buyer demand. Many potential home buyers can no longer afford the prices of homes in high cost real estate markets like the San Francisco Bay Area in California

 Buyers are struggling with rising mortgage interest rates, tougher loan underwriting qualifying standards, high prices and low affordability. Real estate investors want positive monthly rental income cash flow and a hedge against a softening rental market in the future. 

Solution:

·       A mortgage interest rate “buy-down” allows the seller to expand the pool of qualified buyers and real estate investors.

·       The mortgage interest rate buy-down is a seller strategy with multiple options to maintain the seller’s price position

·       The property is offered for sale at the full asking price with a seller credit to discount the mortgage interest rate or a discounted price without a seller credit to discount the mortgage interest rate

·       It’s a “win-win” for both the buyer and seller

·       The seller can deduct the buy down credit as a selling cost expense

·       The buyer receives a 1098 form from the lender and a tax deduction for the buy down credit – “points” paid for the new loan to purchase the property

·       Higher sales price maintains neighborhood property values

·       The discounted mortgage interest rate helps to ensure the buyer will qualify for the loan

·       The buy-down empowers the seller to compete with new home builders offering substantial buyer incentives

·       The lower monthly loan payment increases the potential for positive rental cash flow for real estate investors 

Why Buyers and Sellers are stuck:

In a slow real estate market, sellers usually experience long protracted marketing time-lines to find a qualified buyer.  An over supply of competing homes for sale leaves the seller with few options except to make consistent and substantial downward asking price adjustments until the property sells. Investors are reluctant to buy income properties with negative monthly rental cash flow. Buyers cannot qualify for financing to move up into a larger home or move to a more desirable location. Buyers relocating from a lower cost area into a higher priced market must make a major lifestyle set back to buy a smaller home in a lesser location. 

The process to solve the problem: 

Sellers can align themselves with a reputable lender to find the best mortgage interest rate buy down program and integrate the buy-down with their marketing and pricing strategies Buyers can obtain a loan pre-approval with a reputable lender using a mortgage interest rate buy down program to increase their purchasing power.   

How does mortgage interest rate buy-down program work? 

The seller uses a credit from the proceeds of the property sale to pay additional loan points on the buyer’s loan. The additional loan points will “buy-down” the mortgage interest rate. The discounted mortgage interest rate applied against the same loan amount will reduce the monthly loan payment. So, there is no “out-of-pocket” cost to the seller. The credit paid to the buyer’s lender is a paper transfer at the close of escrow. The buy-down fee is a debit from the seller’s proceeds of the property sale. 

Review the Example and the type of loan used – five-year interest-only loan.

 Example:$644,000 sales price with the Buyer purchasing with 20%down:

Down payment             20%     $128,800

Loan amount                80%     $515,200

Rate/payment               6.375%                       $2,737 per month 

Option I

$644,000 sales price with Seller credit of $10,000 applied to interest rate buy down:

Down payment 20%     $128,800

Loan amount                80%     $515,200        

Rate/Payment               5.5%                           $2,361 per month      

**This results in a monthly payment reduction of $376. 

Option II

Reduce sales price by $10,000 to $634,000 with the Buyer purchasing with 20% down:

Down payment 20%     $126,800Loan amount                80%     $507,200Rate/Payment               6.375%                       $2,694 per month

*** Your buyer saved only $43 per month In order to achieve the same payment of $2,361 per month by using a price reduction you would have to reduce the sales price by $88,750! (see example below) 

Reduce sales price by $88,750 to $555,250:

Down payment 20%     $111,050

Loan amount                80%     $444,200

Rate/ Payment              6.375%                       $2,361 per month

 While a $10,000 sales price reduction is reasonable, an $88,750 sales price reduction is not. The loan interest rate buy down credit is a win/win for the buyer and seller.  

Review Option I –

Compare the difference in the interest rate and monthly payment between the Example and Option 1 

How much will the buyer save each month using the buy-down loan? 

$376 per month…multiply this monthly savings by 60 months and the buyer saves over $22,560 in five years. If the buyer decides to pay a lower price instead of taking advantage of the buy-down interest rate loan- how much does the buyer save each month if the seller lowers the purchase price by a sum equivalent to the 3% credit, in this case, $10,000? 

Review Option II –

The buyer saves $43 per month or $2,580 over five years. 

The buyer can pocket an additional $19,980 if the buyer chooses to pay the full asking price with the mortgage rate buy-down loan.

 How much would the seller have to lower the asking price to achieve the same discounted monthly loan payment and the borrower financing 80% of the purchase price? 

The seller would have to lower the asking price by $88,750 to achieve the same payment using an 80% loan to value ratio.

(Review the “sales price reduction” example) 

The seller is more than likely to be unable or willing to make such a large price concession.  

Why does the buyer receive a tax credit for the buy-down fees paid by the seller? 

The lender is required to issue a 1098 form to the borrower for points paid on the purchase loan. The seller is not the lender’s customer. Therefore, the buyer receives a significant tax deduction of which could make the property purchase even more attractive. 

How do lenders benefit from these buy-down loans? 

1.    It is easier for a buyer to qualify under a discounted loan interest rate and the bank receives upfront “pre-paid” profit from the additional points paid on the loan. 

2.    The discounted interest rate can make it easier to put a second loan behind the discounted first loan and therefore, the buyer can use a smaller down payment to purchase the property – like an 80-10-10 loan. 

3.    The discounted monthly payment can offset additional monthly association fees for buyers purchasing a condominium. 

Is it possible to buy down an adjustable rate loan? 

The interest rate index and margin are added together to create the “note rate”. The buy-down of the margin will lower the note rate and, therefore, the related monthly mortgage payment. The benefits of a margin buy-down in a rising interest rate environment include lower monthly payment increases. 

Is it possible to buy-down the interest rate in a loan refinance? 

The buy-down fee (points) in a refinance is built-in by obtaining a larger loan amount above the existing loan amount. You can reduce the monthly mortgage payment through a buy-down refinance loan. Buying down the interest rate on a new first loan may enable the buyer to qualify for “piggyback” second loan financing to minimize the buyer’s down payment requirement. A lower monthly loan payment on the discounted first loan leaves qualifying room for the buyer’s debt-to-income ratio for the monthly payment on a second loan.  Also, a lower monthly loan payment leaves qualifying room for a buyer’s debt-to-income ratio to pay monthly condo association fees 

Here is a strategy to enable buyers to find sellers willing to pay the buy-down loan fees….

·       Team up with a Realtor to search for properties listed on the MLS for at least 30 to 45 days

·       Look for properties that are vacant and are still listed at the original asking price

·       Occupied properties are OK, too

·       Ask your lender to prepare a loan interest rate “buy-down” outline like the handout for this conference call

·       Draft a full price purchase offer with your Realtor

·       Ask your Realtor to contact the seller’s agent and make it a requirement that your Realtor meet with the seller and the seller’s Realtor in person or on a 3-way conference call including the seller’s agent to present your offer

·       Ask your lender to be on “stand-by” to answer any questions that may come up during the presentation of your offer    

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Move Up Buyer: How to Buy Another Home Without Selling Your Current Home First

Posted by Pete Sabine on October 1, 2007

Avoid the inconvenience and added expense of moving into a rental home in between selling your current home and buying another suitable property. Now move-up buyers can find relief with an affordable and flexible financing strategy. By obtaining an equity line of credit secured by your current home, you can position yourself to find the right home without the worry of not having enough time to sell your home and find another. This financing strategy for your down payment offers many advantages such as a loan fee of no more than $1,000, borrow up to 90% of the value of your current home, pay no interest until you use the loan to finance the down payment of your new home, pay off the loan from the proceeds of the sale of your current home plus this loan is available to borrowers with a less-than-perfect credit history. 

Follow these key steps to find out if this strategy will work for you: 

  • Contact a local real estate professional to assist you with determining the current fair market value of your home. Your Realtor will provide a comparative market analysis (CMA) of recent sales of similar homes in your neighborhood.

  • Subtract the existing loan amount from the current value of your home to determine your equity. Most banks will allow an equity line of credit up to 90% of the appraised value behind your existing loan.

  • Apply for the equity line of credit

  • Apply for a new loan for the purchase of your next home.

Once the loans are approved for the equity line of credit and the new loan for the purchase of your next home, add the sum total of the two loans to determine your top purchase price range. Now you are ready to begin the home search and when you find the right home, your purchase offer will not need the contingency to sell your current home as a condition of completing the sale of the new home. Once your offer has been accepted by the seller and you are confident that you want to complete the sale, list your current home for sale to minimize the time period of owning one home too many.  The equity line of credit secured against your current home is paid off at the close of escrow as well as the existing first loan. This strategy gives you the peace of mind to take your time to find the right home and the confidence that your financing is pre-approved when you need it. 

Call Pete Sabine (925) 407-0606 for a consultation or visit www.GetRealEstateHelp.com.    

RE/MAX CC Connection

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List Your Home: Seven Questions You Must Ask a Realtor

Posted by Pete Sabine on September 26, 2007

Seven Questions You Must Ask a Realtor Before You List Your Home 

Many home sellers make the critical mistake of thinking all Realtors are the same. Start by doing a few hours of research.  Ask around… who’s the most active agent?  Compile a list of agent names and use these questions to help you determine which agent is right for you.                                                

1.  Could you send me some information about yourself? – You can often get a good idea of    which agents are the most professional by looking at their promotional materials.  If their own  materials aren’t professional, how well are they going to market your home?                                             

2.      How long have you been in business?- There is no substitute for experience. An agent with years of experience selling hundreds of homes can handle just about any unique challenge. An experienced agent knows when the market is changing and will provide you with effective options. 

3.      Do you have an assistant or support staff? – By employing someone to handle the details of their business the agent can spend more time servicing your needs.  It may be fine if the assistant does most of the behind-the-scenes work as long as the agent is there at the most critical times of the transaction period.           

4.      How do you use technology to sell my home? –Most of the top agents have a web site to develop a pipeline of prospective buyers for their listings. E-mail marketing has evolved into one of the most effective and efficient advertising tools available. Ask the agent to send you an email with samples of their e-marketing plan. Visit the agent’s web site to find out how they attract potential buyers for your home. 

5.      What listing price do you recommend ? – Take great care in choosing an agent with the knowledge to price your home effectively.  Keep in mind the selling price should attract prospective buyers to your home, get you top dollar in the current market and reflect the condition of your home.  Do not base your decision to list with the agent who quotes the highest price. Some agents will “buy” your listing only to harass you to lower the price after the agent has secured the listing..                                   

 6.      What disclosure laws apply to me? – Make sure your agent helps you with locating professional inspectors for the various mandatory home inspections required in your area.  Create a file including a property transfer disclosure statement, pest control report, applicable C.C.& R’s , applicable hazard zones report, plans for alterations or additions and building permits. 

7.      What types of things separate you from your competition and will you give me some feedback? – How effectively will they advertise?  Do they have 24-hour advertising capability?  How will you follow up on the leads for my home and how often will I hear from you? Agents who are innovative and offer new methods of attracting homebuyers will measurably outperform agents who rely on methods of the past.  Make sure the agent offers a listing cancellation agreement that allows you to cancel the listing prior to the expiration date if your are not satisfied with the agent’s performance. 

For a consultation, call Pete Sabine at 925-407-0606.

RE/MAX CC Connection

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Move Up Buyer: Six Insider Secrets to Avoid Trade-Up Mistakes

Posted by Pete Sabine on September 24, 2007

Making a local move usually means selling one home and buying another. The secret to making it all come together is coordination. Take a moment to review the six insider secrets to a successful move.

  1. Get all the facts early: Determine a realistic fair market value for your current home. Find out how much equity you have to add to the new loan required to buy your next home. Get pre-approved by a reputable lender and choose the best financing program to meet your needs. By doing so, you can determine an affordable price range in which to shop for your next home.
  2. Make a game plan: Make a list of repairs and cosmetic improvements for your current home that will maximize your potential sales price and eliminate delays and surprises during escrow. Complete these improvements before putting your home on the market. Meet with a Realtor to form an aggressive marketing plan to sell your home for the best possible price in a reasonable amount of time.
  3. Sell first: This is the most conventional way to make a trade up to your new home. You are not pressured to accept a below-market value offer just to meet a purchase deadline. In many cases, the Buyer will accommodate the Seller’s need for adequate time to find another home to buy with an option to rent the Seller’s current home from the Buyer past the close of escrow date.
  4. Keep a lookout: Learn the real estate market and stay on top of the inventory of available homes for sale while you are preparing your home to sell and waiting for an acceptable purchase offer. Visit open houses to discover neighborhoods and become familiar with current real estate values. Use time saving technology such as the internet (visit www.ContraCostaLiving.com) to search the Multiple Listing Service in real time. Sign up for a free automatic e-mail listing notification service to have new listings sent directly to your e-mail address that meet your search criteria.
  5. Be flexible: If you buy before you sell you may need to arrange “bridge financing” secured against the equity in your current home. Set up an equity line of credit for the down payment and closing cost on your next home. The advantages of buying first and selling second include the peace of mind knowing that you found the right home without letting go of your current home first, eliminate the anxiety of moving into temporary housing because you ran out of time to find a suitable new home plus the competitive advantage of making your purchase offer “non-contingent” on the sale of your current home.
  6. Coordinate closings: Our experience shows our clients enjoy the smoothest local moves when we work on both the sale and the purchase. There may be 15 to 30 entities involved in the transactions-appraisers, lenders, inspectors, escrow officers, etc. Direct communication is critical to synchronize your next move. The fewer people involved, the more efficient the process. 

Call Pete Sabine (925) 407-0606 for a free consultation.

RE/MAX C.C. Connection.

  

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Sell Your Home: How to Avoid the 7 Mistakes That Could Cost You Thousands of Dollars in the Sale of Your Home

Posted by Pete Sabine on September 19, 2007

 When you sell your home, the difference between a smooth and profitable transaction and a break even, miserable experience is often a fine line. By utilizing the trade secrets of a qualified real estate professional, you’ll ensure the quick, profitable sale of your home. If you are not completely prepared you could end up losing valuable time and thousands of dollars in profits. 

Refusing to Make Profit Inducing Repairs and Cosmetic Changes

It can cost you more money to sell “as-is” than to make repairs that will increase the value of your home. Even minor cosmetic improvements will often yield as much as two to three times the improvement or repair cost at the time of sale. The homebuyer’s first impression is critical to net the highest return on the sale of your home.

Provide Easy Access for Showings

The more accessible your home is, the better the odds of finding a buyer willing to pay your asking price. Appointment-only showings are the most restrictive, while lock box access is the least. Accessibility is the key to profitability.

Priced Too Low/Priced Too High

If the property is priced too low it could cost you considerable profits. If it’s priced too high it will sit and develop the identity of a problem property. The real estate market is constantly changing. Your pricing strategy should be re-evaluated by your Realtor every 14 to 21 days to help you maximize your return.

Relying Solely on Traditional Methods To Sell Your Home

Around the clock advertising exposure, innovative lead generation methods and lead accountability services exist and should be included in the marketing and sale of your home. The Realtor who is innovative and willing to offer new strategies of attracting homebuyers will always outperform agents who rely on traditional methods.

Market Timing/Seasonal Selling

Pricing your home effectively is in direct co-relation to market conditions and supply/demand dynamics. A professional real estate agent continually follows the trends of your local real estate market to know when the market cycle is poised to net you the most money in the sale of your home.

 

Wasting Time With An Unqualified Prospect

Be sure to align yourself with a professional and experienced Realtor to eliminate negotiating with unqualified prospects. An experienced Realtor knows how to screen a prospect’s qualifications before valuable marketing time is lost.

Believing All Realtors are the Same

Your home sale is a time consuming, effort related and often complex task. Rely on an experienced top producing Realtor instead of a friend or family member to handle the intricate details and critical decisions to be made concerning your home sale. Many friends and family have been estranged as a result of failing to meet expectations.

 

To discover more profitable real estate trade secrets, call Pete Sabine (925) 407-0606 or log onto www.GetRealEstateHelp.com

 

RE/ MAX C.C. Connection.

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Credit Scores: The Five Factors of Credit Scoring

Posted by Pete Sabine on September 13, 2007

A good credit score can mean the difference between a low mortgage rate with conventional financing and a restrictive, higher-rate loan. There are five factors that impact consumer credit scores. They are listed here in order of importance:

1. Payment history has a 35% impact.
Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact.
2. Outstanding credit balances have a 30% impact.
Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is never a good idea to close an account: the debt ratio will go up and the number of seasoned lines will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving balance from a 0% card to a 23% card will be minimal relative to what the increased mortgage might be with a low credit score. Hitting the maximums of available credit can be very negative. It may be worth calling and asking the credit company to increase your available credit to lower the debt ratio provided they can do so without a hard credit inquiry.
3. Credit history has a 15% impact.
The length of time a particular credit line has been opened is important. A seasoned borrower is stronger.
4. Type of credit has a 10% impact.
A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only.
5. Inquires have a 10% impact.
Hard inquires for credit will negatively impact the score. Auto and mortgage inquires receive special treatment and 20 inquires made in a 14-day period for auto or mortgage will be treated as only 1 inquiry. The maximum number of inquires that will reduce the score is 10. Any inquires beyond that (11+) in a six month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.

Trade secret tip:
Request that creditors and credit bureaus delete any outstanding debt that is incorrectly charged to you or has yet to be cleared. They have an obligation to react within 30 days. If you choose to pay off an outstanding debt (less than two years old) mark the back of the check “accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit”. You may able to use the cancelled check if the outstanding debt in not removed.

Call Pete Sabine (925) 407-0606 for a free consultation.

RE/MAX C.C. Connection.

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Live Interview With Pete Sabine and Ross McGowan on KTVU Channel 2

Posted by Pete Sabine on September 3, 2007

Click on the photo to view a Live Interview With Pete Sabine and Ross McGowan on KTVU Channel 2

Live Interview With Pete Sabine and Ross McGowan on KTVU Channel 2

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