Q: We are selling our house, and have agreed to assist our purchasers with their monthly payments for the next two years. Someone has indicated that this is called "buying down" a rate, and we are concerned as to the validity and legality of this arrangement. Can you advise?
A: "Buying down" the interest rate for your purchasers is a perfectly legal and valid financing tool, and should be considered by more sellers -- especially with today's interest rates being as high as they are.
Let us take the following example. Your buyer will be obtaining a $75,000 mortgage, amortized over 30 years. If the current rate at savings and loan associations is 16 percent, the monthly amortized mortgage payment is $1,008.57.
Your buyers do now want to exceed 13 1/2 percent, which would have required a monthly payment of only $859.06.
The difference between the 13 1/2 percent payment and the 16 percent payment is $149.51 per month.
You agree to pay this $149.51 each and every month to the purchasers, which in effect, brings their monthly mortgage payments down to an equivalent of a 13 1/2 percent rate.
You have indicated that you are prepared to "buy-down" these rates for a period of two years. I suggest that you instruct the settlement attorney handling the sale for your purchasers to establish a separate interest bearing escrow account, and you should put approximately $3,588.24 ($149.51 x 24 months) into this account. A separate escrow agreement should be written authorizing the escrow agent to make the monthly payments directly to the purchaser.
Here are some suggestions for protecting yourself:
All interest on this escrow account should accrue to the benefit of you, the seller. After all, it is your money.
The escrow agent should be authorized to invest these funds in a financial institution that pays a fairly high interest rate. It should be kept in mind, however, that you will be withdrawing from this account on a monthly basis, and you cannot afford to tie up your money for a long period of time. Thus, you may not get the highest interest rate in town.
The escrow agreement should specifically state that the monthly payments to the purchasers will cease if the property is sold, or if the current loan is refinanced. While you certainly want to help out your purchasers, it is only for a short period of time, when interest rates are high.
Recently, both the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association have agreed to purchase mortgages (deeds of trust) when the seller of the property has contributed cash to the homebuyers interest payments, such as described in this column. The mortgage corporation will purchase these "buy-down" mortgages, provided the appraisal report on the property proves that such practices are customary in the area. Additionally, any subsidy of a monthly payment provided by the buy-down cannot exceed a three-year period and generally cannot be for more than a 3 percent interest rate of adjustment.