When Nicole Fabiano Oertel’s client closed on a home in Chicago’s Logan Square neighborhood, she got a signing bonus from the sellers: A $4,000 closing credit that covered a one percentage point buy-down on her mortgage, as well some of her closing costs.
It saved the buyer $300 a month on her mortgage payment for the first year.
The seller’s credit is a sign of the times, said Fabiano Oertel, a broker with Compass. Sellers eager to close a deal are offering upfront cash to buyers so they can temporarily buy down percentage points on their interest rate until borrowing costs drop again.
Buy-downs work through mortgage points, a cost the borrower pays upfront. Each point that a borrower pays upfront is equivalent to 1 percent of the loan amount. Taking the Chicago Metro Area’s median home sale price of $300,000, a mortgage point would typically cost $3,000 for that home.
“Yes, rates have gone up, but there’s so far less competition right now than a year ago,” Fabiano Oertel said. “Rates have gone up but if we educate you about them and actually show you it’s maybe only a couple hundred dollar difference [monthly] or we do a rate buy-down, you’re actually way ahead of the competition right now.”
Buy-downs allow homebuyers to either permanently or temporarily lower their monthly payments. Many temporary buy-downs, which run for at least a year, allow for buyers to purchase now, with the expectation that mortgage rates won’t stay at this level long-term, and then refinance once rates drop.
Risk comes with the tactic, though, and agents differ in how or whether they employ it. A future with lower rates isn’t a guarantee, and it’s possible it will take longer than a year for those rates to materialize.
“Personally, I have been letting the mortgage lender take the lead on the mortgage rate buy downs,” Compass broker Rafael Murillo said. “I just don’t like the idea of telling my buyers to get into a situation where maybe they’re stretching themselves too thin in hopes that interest rates will come down significantly, and that rate never comes.”
It’s a tool that can be used by any buyer with a mortgage, but especially first-time homebuyers, Fabiano Oertel said. The effect is limited in the luxury sector, where many deals are all cash.
Chicago is one city of many where negotiations over buy-downs are becoming more common, and some lenders are offering them at no initial cost for the borrower. National mortgage lender RocketMortgage is granting what it’s billed as an “inflation buster” free 1-0 mortgage rate buy-downs to attract buyers. The deal lowers the buyer’s interest rate by 1 percent under the contract rate for the first year.
RocketMortgage is also accepting a 2-1 buy-down, in which borrowers can extend the timeline they’d have to refinance at a lower rate. While this setup isn’t being offered freely to borrowers like the 1-0 deal, RocketMortgage said they can negotiate with a seller or agent to buy points so the rate is 2 percent less than the contract rate for the first year, and then 1 percent less in the second year before it reverts up to the full rate.
Murillo said he’s seeing both sellers and mortgage lenders offer buy-downs to make buyers feel more comfortable with the market conditions.
“The saying ‘Marry the mortgage, date the interest rate’ has become the unofficial slogan among the realtor and mortgage community,” he said. “If interest rates go down, all you do is refinance.”
Buy-downs are part of a package of tools that sellers and lenders are using to make deals for homes, Murillo said. Others include assumable mortgages that let buyers take over the seller’s mortgage at its already established interest rate, though not all mortgages are assumable. The market downturn requires creative solutions to make deals: Murillo also closed one where the seller acted as the financier for the buyer.
Mortgage rates have started dropping again, however. Rates have dropped 57 basis points in the last four weeks, according to the Mortgage Bankers Association. Last week, the average contract interest rate on a 30-year, fixed-rate, non-jumbo mortgage dropped to 6.49 percent from 6.67 percent. Yet rate increases as compared to a year ago, when the average was below 4 percent, still pushed buyers out of the market.
“The difference in the market between a year ago [and now] isn’t that your property lost value, but people don’t have 45 buyers standing outside your door,” Fabiano Oertel said. “You’re probably going to get close to your asking price, especially if you are realistic with what we listed at, and you’re going to still get a great deal. You’re just not going to get those buyers that are willing to pay you $50,000 or $100,000 over.”