More homebuildersare offering mortgage buydowns to get potential buyers to the closing table, Axios’ James Briggs reports.
Context: A buydown is when sellers, homebuilders or even lenders pay cash to lower the buyer’s mortgage rate by typically one to three points, Axios’ Emily Peck explains.
The cash goes directly to the mortgage lender during the closing process, Brian Bullock, VP of sales and marketing for Homes By WestBay, tells Axios.
If you’re working with a builder, they may require you to work with their preferred lender, he notes.
Why it matters: Buyers have a shot at more affordable monthly payments.
Of note: Buydowns are nothing new for homebuilders, which have had this tool in their box “forever,” as Peck writes. But it’s a tool most builders are reaching for today.
How it works: Builders pay money up front to cut the price of a mortgage for a period as short as two years or as long as 30 years.
Zoom in: Bullock says Tampa Bay-area buyers are using buydowns in a couple of different ways.
First-time buyers and those limited by affordability are more attracted to long-term buydowns, which can last for the life of their loan.
Lenders use that lower rate to determine how much house the buyer can afford. This helps buyers increase their purchasing power, Bullock explains.
Bullock predicts this type of buydown incentive will continue to be really popular, and necessary, to make purchasing a home affordable for entry-level buyers.
Current homeowners or those who are more financially secure don’t need to be locked into a lower payment to get into a home. They use short-term buydowns to save a little cash in the first couple years of their loan.
Short-term buydowns were hugely popular last year when rates topped 7%, he says.
As mortgage rates decline, short-term incentives have become less popular, Bullock says.
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.
32% of builders are offering buydowns for the entire length of the mortgage.
30% offer reduced rates for the first two years of a mortgage.