The Cost of Buying in NYC: Five Financing Strategies to Consider
Five Financing Strategies NYC Buyers Should Know
Higher mortgage rates have changed the way many New Yorkers approach buying a home. With borrowing costs remaining elevated, buyers are paying closer attention to monthly payments, closing expenses, and the overall cost of homeownership.
But the mortgage rate is only one part of the financial equation. From alternative loan structures to strategies that can reduce closing costs, buyers may have more options than they realize. Here are five worth exploring.
1. Purchase CEMA: Reducing Closing Costs
One expense that often surprises NYC buyers is the mortgage recording tax, which can add thousands of dollars to the cost of purchasing a condo or townhouse.
A Purchase CEMA, short for Consolidation, Extension and Modification Agreement, may help reduce that expense.
As Scott Nadler, Loan Originator at CrossCountry Mortgage, explains, a Purchase CEMA can allow participating lenders to incorporate the seller's existing mortgage into the buyer's new financing, reducing the amount subject to mortgage recording tax.
For example, if a seller owes $500,000 on their mortgage and the buyer needs an $800,000 loan, a qualifying Purchase CEMA could allow the buyer to pay mortgage recording tax on only the $300,000 difference—potentially saving thousands of dollars.
The buyer doesn't inherit the seller's interest rate, and additional fees and lender requirements must be considered. But when the circumstances align, the savings can be significant.
Because co-op purchases generally aren't subject to mortgage recording tax, this strategy is primarily relevant to condo and townhouse buyers.
2. Mortgage Rate Buydowns: Lower Initial Payments
A temporary mortgage rate buydown allows buyers to make reduced payments during the early years of their loan. With a 2-1 buydown, for example, payments are calculated using a rate two percentage points below the mortgage's note rate during the first year and one percentage point below during the second. Payments return to the original rate in year three.
This can provide short-term financial flexibility, particularly for buyers anticipating income growth or other changes in their circumstances. However, the underlying interest rate remains unchanged, and buyers generally must qualify at the full note rate. Availability depends on the lender and loan program.
3. Adjustable-Rate Mortgages: An Alternative to Fixed Rates
An adjustable-rate mortgage (ARM) offers a fixed interest rate for an initial period before transitioning to periodic adjustments. A 7/6 ARM, for example, maintains its initial rate for seven years before adjusting every six months.
When the introductory rate is lower than that of a comparable fixed-rate mortgage, an ARM can reduce initial monthly payments. This may appeal to buyers who expect to move or refinance within a relatively short period. However, future payments could increase, making it essential to understand the loan's adjustment limits and potential long-term costs.
4. Mortgage Points: Paying Upfront to Save Over Time
Buyers may also have the option to pay discount points to secure a lower mortgage interest rate. One point typically costs 1% of the loan amount. On an $800,000 mortgage, that's $8,000 upfront. In exchange, the lender offers a lower rate, potentially reducing monthly payments over the life of the loan.
Whether this makes sense depends largely on how long the buyer expects to keep the mortgage. The important consideration is the break-even point: how long it takes for monthly savings to offset the upfront cost.
5. Seller Concessions: Negotiating Beyond the Purchase Price
Not every opportunity to reduce purchasing costs comes directly from a lender. Depending on the property and market conditions, buyers may be able to negotiate seller contributions toward eligible closing costs or a mortgage rate buydown.
These arrangements can provide financial flexibility without necessarily changing the purchase price. As we've discussed previously, seller concessions aren't always as prevalent in Manhattan as in other markets. Still, they can be worth exploring when negotiating the terms of a purchase.
The Takeaway
Higher mortgage rates have made affordability a greater consideration for NYC buyers, but the interest rate alone doesn't tell the entire story.
Loan structures, closing costs, and negotiated terms can all influence the financial picture. And while not every strategy is appropriate or available for every buyer, understanding the options can help uncover opportunities that might otherwise be overlooked.
Working with knowledgeable real estate and mortgage professionals can help buyers evaluate those options and make informed decisions based on their individual circumstances.
Serj Markarian
