Anna Raymond was ready to make the transition from renting to owning a home last spring. But after five failed bids, she and her husband decided to take a step back from house hunting.
Then, in December, their real estate agent presented them with an offer too good to pass up. A house in Longmont was for sale, and the seller was willing to offer a 2-1 percent buy-in.
The concession would reduce Raymond’s 5.75% contract interest rate by 2% in the first year and 1% in the second year, so they would only pay 3.75% in the first year and 4.75% in the second year before returning to 5.75. % in the third. Raymond said they expect to save about $250 a month during their first year as homeowners.
“I think we just wanted a quick sale for them and a good price for us. So we’ve both been able to be happy in the process,” said Raymond, 28. “We think we’ll be able to refinance in a couple of years, and if we don’t in the worst-case scenario, we’ll have enough paychecks.”
While buyers can’t be sure interest rates will drop until they’re ready to refinance, lowering mortgage rates has become a popular strategy to attract buyers who might otherwise be hesitant to buy a home under today’s high interest rates.
What are mortgage rates?
RedFin’s latest report found a record number of seller concessions — offers such as mortgage interest buybacks that help keep costs down — in the fourth quarter, particularly among cooling “pandemic boom cities” like Phoenix and Las Vegas.
“Almost 100% of the clients I’ve had the opportunity to work with since the fourth quarter of last year, even now, are applying this rate with the seller’s discount,” said Andre, a San Diego-based real estate agent. Connect Realty of Mejia. “The market has finally changed.”
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Now that high interest rates have cooled demand for housing, the days of abundant bidding wars and all-time high prices are long gone.
“Sellers don’t want their house on the market,” said Bud Kawa, a Detroit-based realtor with Brick and Stone Real Estate. “They are more willing to help buyers than they were last year.”
According to RedFin’s January report, buyers received rebates on 42% of home sales in the fourth quarter. That’s the highest quarterly share since at least July 2020, when the real estate brokerage began keeping records.
“We still have some demand, but homes are sitting on the market a lot longer than people are used to,” Howard Veal, Washington, D.C.-based real estate agent at Keller Williams Puget Sound, told USA TODAY. “So lenders got creative, as they often do.”
While most purchases are negotiated between buyers and lenders, sellers and builders can also offer concessions to attract buyers without lowering the list price. After the interest rate hike, the main stimulus could be; The average 30-year fixed-rate mortgage rate on Thursday was 6.15%, up from 3.56% a year ago, according to Freddie Mac.
“Maybe you need a new carpet, you want to paint, you have appliances you want to buy. (A buyout) keeps money in your pocket so you can invest in things you think you might need as a homebuyer,” said Bill Banfield, executive vice president of capital markets for Rocket Mortgage. The credit provider last year started offering a temporary 1-0 purchase, dubbed an “inflation choke”.
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How does a mortgage rate reduction work?
Some common types of purchases are:
- 1-0 purchase, where the contractual interest rate drops to 1% for the first year of the loan.
- A 2-1 purchase where the rate drops by 2% for the first year and 1% for the second year before returning to the contract rate in the third year.
- A 3-2-1 purchase where the interest rate falls to 3% in the first year, 2% in the second year and 1% in the third year before returning to the contract rate in the fourth year.
In which markets is buying and selling observed?
According to RedFin, metro areas with the largest share of discounted home sales in the fourth quarter included:
- San Diego: 73%
- Phoenix: 63%
- Portland: 62%
- Las Vegas: 61%
- Denver: 58%
The lowest share of concessions were in New York (13%), San Jose (14%), Boston (18%), Philadelphia (22%) and Austin, Texas (33%).
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