Last spring, Anna Raymond was ready to make the transition from renting to buying a home. However, after five unsuccessful offers, she and her husband decided to take a break from house hunting.
Then, in December, their real estate agent presented them with an offer that was too good to refuse. The seller of a home in Longmont, Colorado, was willing to offer a 2-1 interest rate buydown.
The concession would reduce the Raymonds’ 5.75% contract interest rate by 2% in the first year and 1% in the second, resulting in interest payments of 3.75% in the first year and 4.75% in the second before returning to 5.75% in the third. Raymond estimates that they will save about $250 per month during their first year as homeowners.
“I believe they were looking for a quick sale, while we were looking for a good price. So we were both happy in the process,” Raymond, 28, explained. “We figure we’ll be able to refinance in a couple of years, and if we don’t, our salaries will catch up.”
Though buyers cannot be certain that interest rates will fall by the time they are ready to refinance, mortgage rate buydowns have become a popular strategy to entice buyers who would otherwise be hesitant to purchase a home due to today’s high interest rates.
What exactly are mortgage rate reductions?
According to a recent RedFin report, the fourth quarter saw a record number of seller concessions – offers like mortgage rate buydowns that help reduce costs – especially in cooling “pandemic boomtowns” like Phoenix and Las Vegas.
“Almost 100% of the clients that I’ve had the opportunity to work with since the fourth quarter of last year, even now, are exercising that interest rate by concession from the seller,” said Andre Mejia of Connect Realty in San Diego. “The market has at long last shifted.”
Are mortgage refinances worthwhile?
Now that high interest rates have cooled housing demand, the days of endless bidding wars and record-high listing prices are over.
“Sellers don’t want their houses to sit on the market,” said Bud Kawa of Brick and Stone Real Estate in Detroit. “They are more willing to assist buyers than they were the previous year.”
According to RedFin’s January report, buyers received concessions in 42% of home sales in the fourth quarter. It’s the highest quarterly share since at least July 2020, when the brokerage began keeping track.
“We still have some demand, but houses are staying on the market significantly longer than people were used to,” Howard Veal of Home Realty Ventures at Keller Williams Puget Sound in Washington told USA TODAY. “As is often the case, the lenders got creative.”
Although the majority of buydowns are negotiated between buyers and lenders, sellers and builders can also offer the concession in order to attract buyers without lowering the listing price. It can be a significant incentive following interest rate increases; according to Freddie Mac, the average 30-year fixed-rate mortgage rate as of Thursday was 6.15%, up from 3.56% the same week a year ago.
“Perhaps you need to put in new carpet, paint, or buy new appliances. “(A buydown) keeps money in your pocket so you can invest in things that you as the homebuyer believe you might need to do,” said Bill Banfield, Rocket Mortgage’s executive vice president of capital markets. Last year, the loan provider introduced the “inflation buster,” a temporary 1-0 buydown.
How do interest rate reductions work?
Among the most common types of buydowns are:
The 1-0 buydown, in which the loan’s contract interest rate is reduced by 1% for the first year.
The 2-1 buydown, in which the rate falls 2% in the first year, 1% in the second year, and then returns to the contract rate in the third year.
The 3-2-1 buydown, in which the interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year before returning to the contract rate in the fourth year.
Which markets are experiencing buybacks?
According to RedFin, the following metro areas had the highest share of home sales with concessions in the fourth quarter:
73% in San Diego
62% in Portland
61% in Las Vegas
Denver has 58% of the vote.
New York (13%), San Jose (14%), Boston (18%), Philadelphia (22%), and Austin, Texas (33%), had the lowest percentage of concessions.