The next topic is seller buy-downs.
So what that means is that the --
seller pays the lender something
in order to lower the interest rate on the mortgage.
So let's say the initial interest rate would have been 6.0%,
and the seller would like to let the borrower get an interest rate of
5.75%.
So what the seller might do is pay the lender upfront,
typically at about a four-to-one ratio.
So that would mean, --
let's say on 100,000 dollar loan, --
you would have to pay; to get to lower the rate by a quarter-point;
you'd have to pay 2%.
So the seller would --
So this might be the builder or,
in some market situations, it could be --
the home seller.
Conceivably, could even be a real estate agent trying to make the sale.
So you pay the lender 2,000 dollars upfront to,
instead of charging an interest rate of 6%,
to charge an interest rate of 5.75%.
Now the ratio between the reduction in the interest rate
and the initial payment is known as the buy down ratio,
and we'll talk --
much later about how that gets computed.
I've just put in 4.
There's nothing magic about 4.
It's really actually a pretty complex calculation
what that buy down ratio will be.
Okay, so what that means;
when the seller buys down the mortgage is that the --
price of the home is inflated by this 2,000 dollar figure.
That is, the seller is, in some sense, getting 2,000 dollars less
than they would have otherwise.
So for a pure market transaction with a market interest rate of 6%,
the price would actually be 2,000 dollars lower.
So if you're a borrower and you buy a house,
and you pay 110,000 but you've got a buy down,
what that means is you really got --
if you could if you want to turn around and sell the house without in turn
buying down the next seller's mortgage,
you'd have to get only 108,000.
So you start out having overpaid for the house.
So what the by down does is
it reduces the borrower's equity, --
because the actual value of the house, the market value of the house,
comes below the initial price.
So that's just another thing to stir in the pot.
And remember the reason that these sorts of things occur,
these buy-downs, is that you're trying to do anything possible
to reduce the buyer's monthly payment,
because those initial monthly payments tend to be high
relative to borrower's income.
Remember, if there's any inflation,
the borrower's income will go up over time and so the burden of the payment falls,
and so the challenge is to lower the burden of payment initially.
And that's why buy-downs get done.