More homebuildersare offering mortgage buydowns to bring potential buyers to the closing table, Axios’ James Briggs reports.
What it is: A buydown is when a seller, a homebuilder or even a lender pays cash to lower the buyer’s mortgage rate, typically by 1 to 3 percentage points, Axios’ Emily Peck explains.
The cash goes directly to the mortgage lender at closing.
If you’re working with a builder, they may require you to work with their preferred lender.
Why it matters: Buyers can secure lower monthly payments.
How it works: Builders pay money up front to cut the price of a mortgage for a period of two years to 30 years.
Of note: Buydowns are nothing new for homebuilders, who have had this tool in their box “forever,” Peck reports. But it’s a tool most builders are reaching for today.
Chicago builders are offering concessions in an amount that buys down the borrower’s interest rates 2% from market rate the first year and 1% the second year, James Burke, Chicago mortgage sales manager at U.S. Bank, tells Axios.
The intrigue: “Everything in real estate is payment-driven,” says Pat Cardoni, a Chicagoland broker and builder with Cardoni Custom Homes.
“These buydowns allow people to get down to pre-COVID payment ranges and be able to get into the house.”
Zoom out: About 75% of builders are dangling mortgage rates that buyers can’t find on their own through lending institutions, according to surveys conducted by John Burns Real Estate Consulting.
About one-third (32%) of builders are offering buydowns for the entire length of the mortgage.
Another 30% offer reduced rates for the first two years of a mortgage.
What they’re saying: Almost all the biggest players are offering an option, whether that be a permanent buydown or one spanning a couple of years, says Michael Freiburger, owner of Wilmette-based Newlook development.
The impact: The short-term benefit for buyers — in the form of a lower monthly payment — is greater than it would be if the sale price were simply reduced by the same amount, Peck writes.
“That’s because the benefit of cutting the sale price would be spread over the life of a 30-year loan instead of concentrated in the first couple of years,” Peck explains.
The bottom line: Buydowns are a modern-day incentive package for homebuyers, Freiburger says.
“Everybody’s doing it, and it’s not going away anytime soon.”