[Script Info]
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[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:01.08,0:00:04.18,Default,,0000,0000,0000,,The next topic is seller buy-downs.
Dialogue: 0,0:00:04.82,0:00:07.71,Default,,0000,0000,0000,,So what that means is that the --
Dialogue: 0,0:00:08.18,0:00:13.00,Default,,0000,0000,0000,,seller pays the lender something
Dialogue: 0,0:00:13.00,0:00:16.90,Default,,0000,0000,0000,,in order to lower the interest rate\Non the mortgage.
Dialogue: 0,0:00:16.90,0:00:22.51,Default,,0000,0000,0000,,So let's say the initial interest rate\Nwould have been 6.0%,
Dialogue: 0,0:00:23.12,0:00:31.02,Default,,0000,0000,0000,,and the seller would like to let \Nthe borrower get an interest rate of
Dialogue: 0,0:00:31.46,0:00:34.33,Default,,0000,0000,0000,,5.75%.
Dialogue: 0,0:00:35.07,0:00:39.84,Default,,0000,0000,0000,,So what the seller might do \Nis pay the lender upfront,
Dialogue: 0,0:00:40.06,0:00:42.32,Default,,0000,0000,0000,,typically at about a four-to-one ratio.
Dialogue: 0,0:00:42.32,0:00:43.59,Default,,0000,0000,0000,,So that would mean, --
Dialogue: 0,0:00:44.04,0:00:46.80,Default,,0000,0000,0000,,let's say on 100,000 dollar loan, --
Dialogue: 0,0:00:48.22,0:00:51.99,Default,,0000,0000,0000,,you would have to pay; to get \Nto lower the rate by a quarter-point;
Dialogue: 0,0:00:51.99,0:00:53.54,Default,,0000,0000,0000,,you'd have to pay 2%.
Dialogue: 0,0:00:53.54,0:00:55.73,Default,,0000,0000,0000,,So the seller would --
Dialogue: 0,0:00:57.61,0:00:59.92,Default,,0000,0000,0000,,So this might be the builder or,
Dialogue: 0,0:01:00.74,0:01:04.11,Default,,0000,0000,0000,,in some market situations, it could be --
Dialogue: 0,0:01:05.06,0:01:06.68,Default,,0000,0000,0000,,the home seller.
Dialogue: 0,0:01:07.49,0:01:11.17,Default,,0000,0000,0000,,Conceivably, could even be a real estate\Nagent trying to make the sale.
Dialogue: 0,0:01:11.50,0:01:16.23,Default,,0000,0000,0000,,So you pay the lender \N2,000 dollars upfront to,
Dialogue: 0,0:01:16.28,0:01:19.82,Default,,0000,0000,0000,,instead of charging \Nan interest rate of 6%,
Dialogue: 0,0:01:20.10,0:01:23.37,Default,,0000,0000,0000,,to charge an interest rate of 5.75%.
Dialogue: 0,0:01:25.42,0:01:29.26,Default,,0000,0000,0000,,Now the ratio between \Nthe reduction in the interest rate
Dialogue: 0,0:01:29.26,0:01:33.08,Default,,0000,0000,0000,,and the initial payment is known \Nas the buy down ratio,
Dialogue: 0,0:01:33.08,0:01:34.07,Default,,0000,0000,0000,,and we'll talk --
Dialogue: 0,0:01:34.56,0:01:38.34,Default,,0000,0000,0000,,much later about how that gets computed.
Dialogue: 0,0:01:38.34,0:01:40.02,Default,,0000,0000,0000,,I've just put in 4.
Dialogue: 0,0:01:40.02,0:01:42.16,Default,,0000,0000,0000,,There's nothing magic about 4.
Dialogue: 0,0:01:42.93,0:01:46.45,Default,,0000,0000,0000,,It's really actually \Na pretty complex calculation
Dialogue: 0,0:01:46.45,0:01:48.74,Default,,0000,0000,0000,,what that buy down ratio will be.
Dialogue: 0,0:01:49.78,0:01:51.89,Default,,0000,0000,0000,,Okay, so what that means;
Dialogue: 0,0:01:53.63,0:01:57.35,Default,,0000,0000,0000,,when the seller buys down \Nthe mortgage is that the --
Dialogue: 0,0:01:58.37,0:02:04.81,Default,,0000,0000,0000,,price of the home is inflated\Nby this 2,000 dollar figure.
Dialogue: 0,0:02:04.81,0:02:09.88,Default,,0000,0000,0000,,That is, the seller is, in some sense, \Ngetting 2,000 dollars less
Dialogue: 0,0:02:09.88,0:02:11.58,Default,,0000,0000,0000,,than they would have otherwise.
Dialogue: 0,0:02:11.95,0:02:19.93,Default,,0000,0000,0000,,So for a pure market transaction \Nwith a market interest rate of 6%,
Dialogue: 0,0:02:20.15,0:02:24.23,Default,,0000,0000,0000,,the price would actually be\N2,000 dollars lower.
Dialogue: 0,0:02:24.46,0:02:27.68,Default,,0000,0000,0000,,So if you're a borrower \Nand you buy a house,
Dialogue: 0,0:02:27.92,0:02:32.23,Default,,0000,0000,0000,,and you pay 110,000 \Nbut you've got a buy down,
Dialogue: 0,0:02:32.23,0:02:35.32,Default,,0000,0000,0000,,what that means is you really got --
Dialogue: 0,0:02:35.68,0:02:40.03,Default,,0000,0000,0000,,if you could if you want to turn around \Nand sell the house without in turn
Dialogue: 0,0:02:40.03,0:02:43.36,Default,,0000,0000,0000,,buying down the next seller's mortgage,
Dialogue: 0,0:02:43.51,0:02:46.80,Default,,0000,0000,0000,,you'd have to get only 108,000.
Dialogue: 0,0:02:46.80,0:02:52.43,Default,,0000,0000,0000,,So you start out having \Noverpaid for the house.
Dialogue: 0,0:02:54.62,0:02:57.43,Default,,0000,0000,0000,,So what the by down does is
Dialogue: 0,0:02:57.43,0:03:00.44,Default,,0000,0000,0000,,it reduces the borrower's equity, --
Dialogue: 0,0:03:06.55,0:03:10.89,Default,,0000,0000,0000,,because the actual value of the house, \Nthe market value of the house,
Dialogue: 0,0:03:10.89,0:03:13.78,Default,,0000,0000,0000,,comes below the initial price.
Dialogue: 0,0:03:14.22,0:03:18.25,Default,,0000,0000,0000,,So that's just another thing\Nto stir in the pot.
Dialogue: 0,0:03:18.25,0:03:21.89,Default,,0000,0000,0000,,And remember the reason that \Nthese sorts of things occur,
Dialogue: 0,0:03:22.07,0:03:26.87,Default,,0000,0000,0000,,these buy-downs, is that you're trying \Nto do anything possible
Dialogue: 0,0:03:26.87,0:03:29.99,Default,,0000,0000,0000,,to reduce the buyer's monthly payment,
Dialogue: 0,0:03:30.18,0:03:33.90,Default,,0000,0000,0000,,because those initial monthly payments\Ntend to be high
Dialogue: 0,0:03:34.25,0:03:36.05,Default,,0000,0000,0000,,relative to borrower's income.
Dialogue: 0,0:03:36.18,0:03:38.98,Default,,0000,0000,0000,,Remember, if there's any inflation,
Dialogue: 0,0:03:39.47,0:03:45.75,Default,,0000,0000,0000,,the borrower's income will go up over time\Nand so the burden of the payment falls,
Dialogue: 0,0:03:45.75,0:03:50.08,Default,,0000,0000,0000,,and so the challenge is to lower \Nthe burden of payment initially.
Dialogue: 0,0:03:50.28,0:03:52.65,Default,,0000,0000,0000,,And that's why buy-downs get done.