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Mortgage buy-downs surge as interest rates climb

Survey finds that about half of the state’s agents work with deals supported by the financial strategy

From left: Total Quality Lending's Ivan Oberon, Delaware Pacific's Waleed Delawari, Agent Zane Widdes and Agent Derek Reilly
From left: Total Quality Lending's Ivan Oberon, Delaware Pacific's Waleed Delawari, Agent Zane Widdes and Agent Derek Reilly

In a residential market slowdown sparked by rising interest rates, agents and lenders look to sweeten deals with the financial tool of mortgage buy-downs, in which the interest rate is lowered for the first few years of a mortgage.

About 49.5 percent of California real estate agents said that more of their buyers had been working with mortgage buy-downs compared to six months earlier, according to an unreleased housing market survey, which was conducted this summer by the California Association of Realtors. The survey will be released during the first quarter of 2023, a CAR representative said.

The survey was taken a few months after real estate markets were jolted by a set of interest rate hikes mandated by the Federal Reserve Bank to tame inflation. The survey marked the first time CAR asked agents about mortgage buy-down.

The CAR survey broke down respondents by geographical area. In the San Francisco Bay Area, half of the real estate agents surveyed said that more of their buyers were working with mortgage buy-downs. In Southern California, 46.3 percent of agents said that their deals had been helped with mortgage buy-downs. In other parts of the state, 55.6 percent of agents said that more of their clients had been working with mortgage buy-downs.

The surging popularity of buy-downs is something new, said Ivan Oberon, a senior mortgage consultant with Irvine-headquartered Total Quality Lending.

“I found that even more seasoned agents weren’t necessarily familiar with this strategy. It is significant that it is getting more notoriety,” Oberon said. Mentions of mortgage buy-downs have been reappearing in his company’s marketing materials after a long hiatus, he said,

As interest rates have climbed, mortgage buy-downs have appeared in other media this year, such as news articles as well as advertisements. Independent lenders have YouTube tutorials on how to use the strategy.

“Get creative”

Derek Reilly, a Santa Monica-based agent, concurred that less seasoned real estate salespeople did not know about mortgage buy-downs, which haven’t been widely used for more than 20 years. The financial tool was off of buyers’ radar during the bonanza market of 2021. Then the market started deflating after a set of interest rate hikes in mid-2022.

“It was when everybody started talking about the need to get creative,” said Reilly of Westside Expert at Keller Williams Advisors in Santa Monica.

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Reilly stressed that the agent’s role is not to sell financial tools such as mortgage buy-downs. Rather, it’s to present a mortgage buy-down as an option to close the deal. Agents refer their buyers to lenders.

Before the lender can charge the mortgage, the seller must agree to pay for the buy-down.

Mortgage buy-downs tools have been used for homes that have been on the market for a while, said Waleed Delawari, president of Pasadena-headquartered mortgage broker Delaware Pacific. The rate buy-down may cost a seller $10,000 to $30,000.

For sellers, it’s the lesser of two evils. “It’s a smaller pill to swallow compared to a $100,000 price reduction,” Delawari said. This year, more buyers have been requesting mortgage buy-downs on newly listed properties, he said.

The most common mortgage buy-down plans are called a 3-2-1 plan and a 2-1 plan, which correspond to the years estimated to pay down the loan.

In a 2-1 mortgage buy-down, funds supplied by the seller allow the buyer to make mortgage payments with a 2 percent reduction below its qualifying base rate for the first year. The following year, the buy-down will allow the buyer to pay 1 percent below the mortgage rate. The next year, the buyer will be required to pay the mortgage at its original qualifying base interest rate.

Buyers have the option of refinancing the mortgage rate at any point of the mortgage buy-down, Delawari said.

But don’t count on mortgage buy-downs remaining as a viable tool in the real estate lending scene when interest rates decline.

Zane Widdes has worked as a real estate agent since 1988. He remembers a surge in popularity for mortgage buy-downs around 2000 when interest rates were 8.05 percent. “We used them every time there’s a bit of (an interest rate) spike,” he said.

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Home SalesHousing MarketInterest RatesMortgages