Buydowns can help buyers struggling with high interest rates
Educating buyers about mortgage rate buydowns can mean more closed deals for agents.
Key points:
- Buydowns — both temporary and permanent — can offer savings upfront or over the life of the loan.
- “There’s a need to have different options to bring qualified buyers to the table,” said Century 21 broker Mike Allen.
Temporary rate buydowns are a hot trend for mortgages as borrowers face higher costs for home loans.
Some buyers are exploring alternatives to traditional mortgages in a period of rising interest rates that is expected to continue into 2023. Despite dips in recent weeks, mortgage rates are still double what they were a year ago, and on Wednesday, the Federal Reserve is expected to decide whether to raise interest rates for the seventh time in 2022 — which could further drive up the costs for home mortgages.
"Realtors are priming sellers that we're in a different market and there's a need to have different options to bring qualified buyers to the table," said Mike Allen, president and broker at Century 21 Jordan-Link and Company of California. "It's all about trying to make transactions work in this higher interest rate landscape."
And more agents are encouraging prospective buyers to consider buydowns. Buydowns — both temporary and permanent — are a less costly alternative to traditional fixed-rate mortgages.
Savings can be front-loaded or long term
With temporary rate buydowns, the buyer gets a reduction on the interest rate in the first two years of the mortgage — typically 2% less the first year and 1% less the second. This provides some liquidity and eases the "shell shock" of the interest rate portion of the loan payment, Allen said. Or, it may get the buyer into a more expensive home.
A permanent buydown can be a good option for people seeking lower interest costs over the lifespan of a home loan, said Allen. With a permanent buydown, the borrower is buying a lower rate for the entire length of a 30-year fixed mortgage. This strategy makes sense for people who plan to stay in their home longer.
Permanent buydowns are done by the lender by offering discount points. The more discount points the buyer pays down, the greater the reduction in the mortgage rate. The buydown is paid at closing and added on to the costs at settlement.
Allen says both temporary and permanent buydowns can help more deals go through in an environment where higher interest rates are pricing buyers out of the market, and causing some sellers to pull their listings or keep their homes off the market altogether.
Tampa real estate agent Robert Drummer of Future Home Realty is also bullish about buydowns. "When discussing interest and inflation impacts with prospective buyers, I am suggesting temporary rate buydown options. Most buyers are not familiar with these programs, so I find that it's an opportunity to educate them with the bonus benefit of easing their minds and showing them that they can get the home they want and stay within budget," Drummer said.
Allen is seeing more buydowns with new construction. "Dollars are being redirected to short- and long-term buydowns that are negotiated as part of the contract. The sellers agree to credit the buyer toward that buydown. It all happens with the transaction," he said.
Providing information upfront is key. "It's important that buyers understand what happens at the end of the buydown period," Drummer said, "but so far they have been grateful to hear that there are options that may work." Drummer emphasizes the following points in educating consumers about temporary buydowns:
With temporary buydowns, the buyer gets a lower interest rate — but only for the first few years of a mortgage.
The seller may increase the purchase price to make up for the costs of the buydown.
Buydowns don't necessarily give borrowers a better deal but may make home purchases easier to manage financially, giving buyers some breathing room.