Anna Raymond was ready to make the switch from renting to owning a home last spring. But after five failed offers, she and her husband decided to take a step back from house hunting.
Then, in December, their real estate agent presented an offer too good to pass. A home in Longmont was up for sale, and the seller was willing to offer a 2-1 interest rate buydown.
The concession would lower the Raymonds’ 5.75% contract interest rate 2% in the first year and 1% in the second year, so they’ll pay just 3.75% interest in the first year and 4.75% in the second year before returning to 5.75% in the third. Raymond said they expect to save about $250 a month during their first year as homeowners.
“I think for them, they just wanted a quick sell and for us, we wanted a good price. And so we were able to both be happy in the process,” Raymond, 28, said. “We figure we can refinance within a couple of years and, worst-case scenario, if we don’t, our salaries will catch up.”
Though buyers can’t be sure interest rates will drop by the time they’re ready to refinance, mortgage rate buydowns have become a popular strategy to attract buyers who may otherwise be hesitant to purchase a home under today’s high interest rates.
What are mortgage rate buydowns?
A recent report from RedFin found a record number of seller concessions – offers like mortgage rate buydowns that help reduce costs – in the fourth quarter, especially among cooling “pandemic boomtowns” like Phoenix and Las Vegas.
“About 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 San Diego-based real estate agent Andre Mejia of Connect Realty. “The market has finally shifted.”
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Are mortgage buydowns worth it?
Now that high interest rates have cooled housing demand, gone are the days of abundant bidding wars and all-time-high listing prices.
“Sellers don’t want their houses to sit on the market,” said Bud Kawa, a Detroit-based realtor at Brick and Stone Real Estate. “They are willing to help out buyers more than they were in the last year.”
Buyers received concessions in 42% of home sales in the fourth quarter, according to RedFin’s January report. It’s the highest quarterly share since at least July 2020, when the real estate brokerage started keeping record.
“We still have some demand, but houses are staying on the market significantly longer than what people were used to,” Washington-based real estate agent Howard Veal of Home Realty Ventures at Keller Williams Puget Sound told USA TODAY. “So the lenders, as they often do, got creative.”
Though a majority of buydowns are negotiated between buyers and lenders, sellers and builders also can offer the concession to attract buyers without reducing the listing price. It can be a major incentive after interest rate hikes; the average 30-year fixed-rate mortgage rate as of Thursday was 6.15%, up from 3.56% the same week a year ago, according to Freddie Mac.
“Maybe you’ve got to put in new carpet, you want to paint, you’ve got appliances you want to buy. (A buydown) keeps money in your pocket so you can invest in things that you as the homebuyer think that you might need to do,” said Bill Banfield, executive vice president of capital markets for Rocket Mortgage. The loan provider started offering a temporary 1-0 buydown dubbed the “inflation buster” last year.
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How do mortgage rate buydowns work?
Some common types of buydowns include:
- The 1-0 buydown, in which the contract interest rate drops 1% for the first year of the loan.
- The 2-1 buydown, in which the rate drops 2% for the first year and 1% the second year before returning to the contract rate in the third year.
- The 3-2-1 buydown, in which the interest rate drops 3% the first year, 2% the second year and 1% the third year before returning to the contract rate in the fourth year.
Which markets are seeing buydowns?
According to RedFin, metro areas with the greatest share of home sales with concessions in the fourth quarter include:
- San Diego: 73%
- Phoenix: 63%
- Portland: 62%
- Las Vegas: 61%
- Denver: 58%
The lowest share of concessions were in New York (13%), San Jose (14%), Boston (18%), Philadelphia (22%) and Austin, Texas (33%).
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