Payment abatement? What the heck is that?

You've probably seen advertisements for new construction homes that say, “Purchase a new home and don’t make payments for up to 6 months!” This is a payment abatement program. The seller, in this case the builder, will make your first six mortgage payments (interest-only payments).

With the slower housing market, there are more properties on the market and it is taking them longer to sell. This increase in inventory of homes will affect the housing market until they are all sold and/or taken off the market.

How can someone sell their home in a slow market?

Many Realtors have asked me about the payment abatement program over the past several weeks as a way to drive more traffic to their listings. They are beginning to advertise their listings by saying, “Move into this beautiful home and don’t make a payment for up to 6 months!” Now, that will surely attract more buyers and could possibly be the deciding factor when the buyer is looking at several similar properties in the area.
How does it work?

When the contract is written, the seller offers the payment abatement for 1 to 6 months the same way as they would any other seller’s concession (e.g. closing costs, points, etc.). They agree to pay an amount equal to the number of interest-only mortgage payments they are willing to make for the buyers. The amount of the payment abatement is still subject to the limitations of the mortgage programs. Generally, if the borrower has a 5- 10% down payment, the seller can give up to 3% of the sales price as a seller’s concession. For a 10% - 25% down payment the seller can give up to 6%. And, for a 25% or more down payment, the seller can give up to 9%.

The payment abatement program is an interest-only mortgage program and is offered as a 30 year fixed rate mortgage or a 3/1, 5/1, 7/1, or 10/1 ARM. The interest-only period for the fixed rate mortgage is 10 years (there is also a 15 year option) and the interest-only period for the ARMs is equal to the initial fixed rate period. After the interest-only period, the payment is calculated by amortizing the balance of the mortgage over the remainder of the 30 year period.
Can the buyers pay off their principal during the interest-only period?

Yes. The amount of interest due on the following payment will then be reduced to reflect the reduction in principal. May people may be uncomfortable with an interest-only loan (especially with all of the bad press they’ve received lately) so this makes them more like a traditional fully-amortizing loan. But, the buyer is the one that has to add the principal each month. This is also a good idea to avoid payment shock when the interest-only period ends and the new payments are now fully-amortizing.

Want to know more about how a payment abatement program might work for you? Just drop me an email or give me a call.