Housing market slump brings back 2-1 mortgage rate buybacks

Mortgage rate buybacks can vary, but in a 2-1 rate buyback, a seller essentially pays an amount of money to lower the buyer’s rate by 2 percentage points in the first year and 1 percentage point in the second year. Until the third year, the buyer pays the exchange rate.

“[Buyers] save huge amounts of money in their first and second years, even if they stick to the bank rate, they have the first two years to get their finances in order,” Evan Tendo, CEO and Broker of Record at ANR Finance + Real Estate , told wealth.

If a buyer buys a $600,000 home and borrows $570,000 at a fixed rate of 6%, their monthly payment would be approximately $3,417. But with a 2:1 mortgage rate buy-off in the first year, her monthly payment would be about $2,721 (at a 4% rate). And for the second year, her monthly payment would be $3,060 (at a 5% rate). Therefore, the buyer saves $8,354 in the first year and around $4,291 in the second year.

“It’s always been available, but in the past few years nobody has used it because there really wasn’t a need, especially in 2020 and 2021,” Tendo said. “But when we got to 7%, [mortgage rates] In October we really had to find a way to get people into apartments and make it affordable.”

But there are a few things to consider: the buyer must qualify for the full interest rate (eligibility may vary by loan type), and the money doesn’t just flow straight into their pockets. Instead, it is placed in an escrow account that actually works in the buyer’s favor when prices fall. So let’s say interest rates go down, then the buyer can choose to refinance and lock in that lower interest rate, but the money left in escrow is still owned by the buyer and can be used as a loan.

“The seller pays those fees,” Tendo said wealth. “And that’s money you’ll never lose, even if you refinance it.”

So you may be wondering what’s in store for the seller considering it cost them over $12,600 in the above scenario? Well, they’re selling their properties in this slumped housing market that’s in correction mode due to a lack of affordability due to mortgage rates that have nearly tripled from record lows combined with home prices that have risen more than 40% during the pandemic housing boom .

Not to mention that it’s not a great time to lose buyers, particularly for builders as they grapple with prolonged pandemic-related supply chain disruptions and a historic backlog. Mario Pinedo, mortgage broker at HomeLoans.LA, narrates wealth that installment buybacks are a way to close the gap between rapidly rising mortgage rates and that many homebuilders are taking advantage of the incentive to move their holdings.

“It’s a seller [offered] Incentive,” said Pinedo.

According to Pinedo, it is more beneficial for a developer to use a buyback with a 2:1 interest rate rather than a reduction in the selling price, as this preserves value and attracts buyers. Builders have had so much success with buydowns that many offer buydowns well beyond two years.

According to John Burns Real Estate Consulting, as of December last year, 75% of homebuilders surveyed nationwide said they were lowering buyers’ mortgage rates to make them affordable. Some builders surveyed said that “everyone needs incentives” and that “rate buybacks and/or rate lockdowns work best” and “100% of the backlog is offered some sort of rate buyback comparable to new sales.”

Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting, previously said wealth that buybacks are “one of the levers encouraging consumers to buy new homes.”

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