Mortgage rates are double where they were a year ago, making home buying a much more costly endeavor. Home sellers are trying to help them out.
Buyers are not feeling the market, depressing mortgage demand. Rates are hovering at around 7%, which adds hundreds of dollars in additional monthly payments for prospective buyers’ budgets.
Even though the number of for-sale homes is growing, they’re still expensive, creating affordability issues for buyers.
Some builders and sellers are getting more creative, and offering ways for potential home buyers to lower their mortgage rate and monthly payments.
Michael Isaacs, CEO of GO Mortgage, suggests a 3-2-1 buydown or 2-1 buydown.
“There are programs out there today, like something called a 2-1 buydown or a 3-2-1 buydown,” Michael Isaacs, the CEO of GO Mortgage, told MarketWatch on the sidelines of the Mortgage Bankers Association annual conference in Nashville, Tenn., last week.
The 2-1 and 3-2-1 temporary rate buydowns are mortgage products that offer lower rates in the first few years of repayment, after which they permanently reset to the higher market rate.
Mortgage-rate buydowns in particular are becoming popular, particularly since housing costs have risen significantly, she added.
The 3-2-1 temporary rate buydown works like this: When a seller or builder pays some amount of money upfront to buy the rate down, that rate goes from 7% — where it is today — to 4% at the start of the payment period. Then, after a year, that rate goes up to 5%; the following year 6%; and then 7%.
“So you can buy it down 3 points the first year, 2 points the next year, 1 point and then in the fourth year, it goes to its normal rate,” Isaacs elaborated.
“‘Because a lot of people think that rates will be lower two years from now, it’s a good way, psychologically and economically, to get into a house at a start rate that’s lower than where rates are today.’”
Or a seller can offer a 2-1 buydown, which has two periods of adjustment: It begins at 5%, then 6% after a year, then 7% or market rate.
“Because a lot of people think that rates will be lower two years from now, it’s a good way, psychologically and economically, to get into a house at a start rate that’s lower than where rates are today,” Isaacs said.
They are not new products, but they’re gaining popularity as rates are now more than double what they were a year ago.
Generally, these rate buydowns are paid for by the home buyer, where they set aside part of their down payment, or the home seller or homebuilder can offer it as a negotiating tactic.
Ali Wolf, chief economist at Zonda Research, a real-estate research company, told MarketWatch that her firm’s data is showing an uptick in builders offering these buydowns.
“Home sellers are figuring out how to attract and retain buyers in today’s slower housing market,” Wolf said. “Homebuilders, in particular, are in a place to offer incentives to help buyers. Incentives come in many forms, including funds towards options and upgrades, discounted closing costs, and mortgage-rate buydowns.”
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