Buyers can leverage new negotiating power
A year ago, home buyers didn’t have much negotiating power. They paid above list price, waived contingencies, and many found themselves in fierce bidding wars. It’s a different story today, though. Recent shifts in the market have swung the pendulum in favor of buyers — giving them room to bargain.
What’s the best way to leverage this newfound power? Should buyers negotiate for a lower price, or is there another way to get more bang for your buck?
Mortgage expert Shivani Peterson discussed this topic on a recent episode of The Mortgage Reports Podcast. Here are the strategies she recommends for today’s buyers.
Listen to Shivani on The Mortgage Reports Podcast!
Reduced price vs. seller buydowns
When the number of homes for sale exceeds demand, properties sit on the market longer. In this scenario, buyers often take advantage of the supply-demand mismatch by offering a lower sales price. But this isn’t the only way to get a good deal on a home.
According to Peterson, one of the most popular strategies at the moment is a seller buydown or “seller-paid points.” This is how it works:
Let’s say there’s a house listed at $450,000. Instead of a buyer putting in an offer for $440,000 (which is $10,000 below asking), they submit an offer for the full asking price and then request a $10,000 seller credit. They’ll then use this credit to buy “points” and reduce their interest rate. Each point costs 1% of the loan amount and lowers the buyer’s rate by about 0.25 percent.
It’s often a win-win for both parties. The seller nets the same amount as reducing the asking price by $10,000, and the buyer gets a lower interest rate and monthly payment.
Should you buy down your interest rate?
Buying down your mortgage rate using seller credits can make a big difference in your monthly payment. It could even save you more money than a lower sales price in the long run. But is it the best way to negotiate when buying a home?
To answer this question, you have to analyze all the data and let the numbers speak for themselves, advises Peterson.
According to a recent forecast, Fannie Mae projects that mortgage rates could dip back below their current levels in 2023. In this case, some homeowners might be able to refinance and get a better interest rate down the line. Based on this projection, does it make sense to skip a buydown and lock in a lower home price now?
Peterson feels this question is worth consideration because while buyers are married to the price they pay for a house, they can divorce their interest rate at any time by refinancing and getting a new one.
How to evaluate your home buying options
If you can’t decide between a buydown and a price reduction, Peterson recommends asking your mortgage advisor to run an analysis on your interest savings over the projected time period of a forecasted refinance opportunity, such as 18 months.
“If a seller buydown is better for you in terms of interest savings over the next 18 months, I say take the credit over reducing the price, and then discuss the best way to structure the purchase deal with your real estate agent.”
Peterson highlights that this $10,000 scenario is only a random number. In some markets, buyers might negotiate a bigger seller buydown and save more on a monthly basis.
Also, keep in mind that your ability to get a lower rate next year or even later isn’t guaranteed. While some experts think rates could fall next year, others believe mortgage rates will actually increase in 2023. So you might not want to bank on a lower rate that could never materialize.
Your next steps
The bottom line is to use your negotiating power to your advantage — whether you’re getting a price reduction or seller credit toward a better rate.
Work closely with your real estate agent and loan officer to figure out what type of offer makes the most sense for you. Do you need to save more money now or are you focused on long-term costs? Having a clear goal will make it easier to craft a purchase offer that works in your favor.