We can't help but get a sense of deja-vu-all-over-again when we read about the latest mortgage industry 'gimmick'...
What happens when these 'buy-downs' reset at even higher rates?
And how does this allow the housing market to 'correct' as Fed Chair Powell wants?
With mortgage interest rates currently hovering around 7 percent, many lenders across the country have seen a resurgence of the mortgage buy-down - a plan that allows potential homeowners to save money on monthly mortgage payments.
The National Association of Mortgage Brokers (NAMB) describes a mortgage buy-down as a type of financing that provides lower interest rates for at least a few years of the mortgage. They typically are offered by the home seller or builder who contributes to an escrow account that subsidizes the loan during the first few years.
In a 2-1 buy-down, homebuyers can save on interest rates for the first two years of the loan, but will pay the full interest rate at the time of signing for the third year. A 3-2-1 buy-down operates under the same principle: lower payments for the first three years and full interest for the fourth year of the mortgage.
“I’ve seen this a lot in the past, and it’s a way for the consumer to be able to purchase the home they want when increased interest rates would make their mortgage payments too high,” Ernest Jones Jr, NAMB board president told The Epoch Times.
“If the buyer is willing to offer the seller more for their home, the seller will sometimes make concessions in the form of a buydown. However, the home still has to appraise for the higher amount.”
For example, if a buyer opts for a 2-1 buydown, the interest rates will be 2 percent below the current rate for the first year, and 1 percent below for the second year before rising to the regular, permanent rate. In the event that the market’s interest rates drop by the third year, the buyer always has the option to refinance.
“Before this recent turn in the economy, most of the time sellers didn’t have to make any concessions,” Jones said.
“People were just rolling in and paying above market prices. Now things are starting to change and sellers may be willing to help buyers more with the purchase, especially if they’re in position where they need to move quickly.”
Builders Are Ahead
Jones explained that seller concessions are limited by the down payment that the buyer makes. On most loans, seller concessions may be limited to 3 percent, unless the buyer puts down 10 to 20 percent.
“I think we may start to see this more with new construction,” he added.
“Builders are in a better position because they control all of the costs.”
Jones noted that a buy-down is not the same as an adjustable-rate mortgage (ARM), where the rate is fixed for a set period of time before adjusting to a variable rate.
Once the market levels out, he said, sellers may be more reluctant to give concessions.
“In areas like Phoenix, where property values shot up substantially over the past two years, the home equity grew very quickly,” said Jones.
“In cities where there has not been so much growth, and in rural areas, you’ll see less of this type of financing.”
Mo Hamideh, branch manager of Nations Lending in Scottsdale, Arizona, has been seeing a lot buy-downs lately.
“Everyone seems to be asking for them, and I think the real estate agents have been overselling it as well,” he told The Epoch Times.
“Buyers are looking for some relief with their monthly payments, but they still have to qualify at the higher payment levels.”
Hamideh and his team cover the entire Phoenix metropolitan area, where new construction is booming. Still, he said, builders have not been able to keep up with the demand for housing. As a result, rents are also on the rise, as people who can’t find the home they want are forced to opt for an apartment. “Like the rest of the nation, we still have an inventory issue here,” he said.
Much of Arizona saw a huge increase in home prices over the past two years, as people from the Northeast and coastal regions of the country looked to western and southern states for more affordable home options. “When interest rates were low, people were paying way over asking prices and waiving home inspections,” recalled Hamideh. “Now things are different, and buyers are actually able to negotiate with sellers.”
‘Just Like a Marriage’
Derek Fertig, senior vice president at Fairway Independent Mortgage Corp. in Fort Lauderdale, Florida, admits that mortgage buy-downs have their pros and cons.
“They’re just like a marriage–for better or worse,” he told The Epoch Times.
“Buyers can save money on their monthly payments for the first couple of years, but once the discounted rate period ends, their monthly payments could end up higher than what they expect. That could be a problem if their income drops since buying the home.”
Echoing Jones’s observation, Fertig said buy-downs have been around for a long time, but the rising interest rates brought them to the forefront this year. Many times, sellers will opt to help buyers with a mortgage buydown rather than reduce the price of their home. “Buyers are basically paying attention to the dollar amount of payments,” he said. “Their biggest concern is, ‘Is this house affordable for me?’ and if not, they won’t make the move.”
By offering credits toward a mortgage buy-down, he explained, the seller doesn’t need to reduce the price of the home, and the buyer is able to more easily afford the payments for the next few years.