Buying a home is an expensive undertaking, and today more so than in recent years. Mortgages require a commitment to pay a home’s “purchase price” AS WELL AS for the privilege of borrowing money. Borrowing has become more expensive which, unfortunately, has taken millions of buyers out of the market.
We can all hope for interest rates to come down, but in the meantime, there are things those still in the market can do to reduce expenses. For starters, we can all use more of our own money towards the purchase or pay all cash outright if that is doable. Interest rates be damned on that extreme end of the spectrum; however, this is only a dream for most homebuyers. We can keep mortgage payments more manageable in the future by scraping up as much capital as possible for the upfront payment to score a lower interest rate on the mortgage back-end. A mortgage buydown. A way for a borrower to obtain a lower interest rate by paying discount points, also referred to as mortgage points, or prepaid interest points, as a one-time upfront fee. The net result is a lower interest rate for the life of the mortgage.
Although buyers (borrowers) benefit from buydowns, it is not beyond the realm for sellers, and builders to purchase points to lower a prospective buyer’s interest rate. Inventories are growing, not necessarily because more people are selling their homes, but because properties are taking longer to sell with our current universe of “less qualified” buyers.
While the majority of buydowns are negotiated between buyers and lenders, sellers may also offer to buy down a buyer’s mortgage to incentivize the buyer to purchase their home. In these circumstances, the seller might make a one-time deposit into an escrow account or pay for points over the entire loan term as a concession. Builders may also offer to pay points to buy down buyers’ mortgages. Typically, a builder will make these upfront payments to entice early buyers to purchase properties in newly built communities. With things cooled down, it cannot hurt to ask, or negotiate.
Otherwise, if you’re wondering when rates will “return to normal,” consider that the average mortgage rate over the past 50+ years is close to 8%. Be careful what you wish or wait for. There is an opportunity NOW!
For more information on mortgage rates, check out Karen’s earlier blog post Real Estate Mortgage Outlook for 2023.
Karen’s Tip: Keep in mind that buydowns only really make sense if the buyer in question intends to own the home for a long time.
Karen would love to help you do the individualized calculations required to see if a buydown will be worthwhile for you! Contact her today and explore your options.
