Anna Raymond was ready to transition from renting to owning last spring. But after five unsuccessful offers, she and her husband decided to take a step back from house hunting.
Then, in December, their realtor presented an offer that was too good to accept. A house in Longmont was for sale and the seller was willing to offer a 2-1 interest rate buyout.
The concession would reduce the Raymonds’ 5.75% contractual interest rate by 2% in the first year and 1% in the second year, so they would only pay 3.75% interest in the first year and 4 .75% the second year before returning to 5.75. % In the third. Raymond said they expect to save around $250 a month in their first year as owners.
“I think for them they just wanted a quick sale and for us we wanted a good price. And so we were both able to be happy in the process,” said Raymond, 28. “We think we can refinance years from now and, in the worst case scenario, if we don’t, our wages will catch up.”
Although buyers can’t be sure that interest rates will drop when they’re ready to refinance, mortgage rate buyouts have become a popular strategy to entice buyers who might otherwise be hesitant to buy a home below the rates. today’s high interest rates.
What are mortgage rate buyouts?
A recent report from RedFin found a record number of seller concessions — deals like mortgage rate buyouts that help cut costs — in the fourth quarter, especially among chilling “pandemic boomtowns” like Phoenix and Las Vegas. .
“About 100% of the clients I’ve had the opportunity to work with since the fourth quarter of last year, even now, are charging this seller’s concession interest rate,” said Andre, a real estate agent based in San Diego. Mejia of Connect Realty. “The market has finally changed.”
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Are mortgage buyouts worth it?
Now that high interest rates have dampened housing demand, the days of bountiful bidding wars and record listing prices are over.
“Sellers don’t want their homes to stay on the market,” said Bud Kawa, a Detroit-based real estate agent with Brick and Stone Real Estate. “They’re ready to help shoppers more than they were last year.”
Buyers received concessions in 42% of home sales in the fourth quarter, according to RedFin’s January report. This is the highest quarterly share since at least July 2020, when the real estate brokerage started keeping records.
“We still have some demand, but the homes are sitting on the market much longer than people were used to,” real estate agent Howard Veal of Home Realty Ventures in Keller Williams Puget Sound told USA TODAY. “So the lenders, as they often do, got creative.”
Although the majority of buyouts are negotiated between buyers and lenders, sellers and builders may also offer the concession to entice buyers without reducing the listing price. This can be a major incentive after interest rate hikes; the average 30-year fixed-rate mortgage rate as of Thursday was 6.15%, down from 3.56% the same week a year ago, according to Freddie Mac.
“Maybe you need to put in new carpet, you want to paint, you have appliances you want to buy. (A buyout) keeps money in your pocket so you can invest in things that you, as a buyer, think you should do,” said Bill Banfield, executive vice president of capital markets for Rocket Mortgage. The loan provider began offering a temporary 1-0 buyout last year dubbed the “inflation buster”.
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How do mortgage rate buyouts work?
Some common types of redemptions include:
- The 1-0 buyout, in which the contract interest rate drops by 1% for the first year of the loan.
- The 2-1 buyout, in which the rate drops by 2% in the first year and 1% in the second year before returning to the contractual rate in the third year.
- The 3-2-1 redemption, in which the interest rate drops by 3% in the first year, 2% in the second year and 1% in the third year before returning to the contractual rate in the fourth year.
Which markets are seeing buybacks?
According to RedFin, the metro areas with the largest share of Q4 dealership home sales include:
- San Diego: 73%
- Phoenix: 63%
- Portland: 62%
- Vegas: 61%
- Denver: 58%
The lowest share of dealerships was in New York (13%), San Jose (14%), Boston (18%), Philadelphia (22%) and Austin, Texas (33%).
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