‘Incentives come in many forms’: According to the CEO of this mortgage company, here’s how to lower mortgage rates.

Aarti Swaminathan

Mortgage interest rates have doubled from a year ago, significantly increasing the cost of buying a home

Mortgage interest rates are double what they were a year ago, and buying a home is much more expensive. Home sellers are trying to help them.

Buyers are not feeling the market, pushing down demand for mortgages. Rates hover around 7%, adding hundreds of dollars to prospective buyers’ budgets every month.

Although the number of homes for sale is increasing, they are still expensive, creating affordability issues for buyers.

Some builders and dealers have gotten more creative, offering potential homebuyers ways to lower mortgage interest rates and monthly payments.

GO Mortgage CEO Michael Isaacs told MarketWatch at the Mortgage Bankers Association’s annual conference in Nashville. Tennessee, last week.

2-1 and 3-2-1 Temporary Rate Buydowns are mortgage products that offer lower interest rates for the first few years of repayment, after which they permanently reset to higher market rates.

Mortgage rate buybacks have become popular, especially as housing costs have risen significantly, she added.

The 3-2-1 temporary rate buydown works like this: If the seller or builder pays some amount up front to lower the rate, the rate will go from his current 7% to his 4% at the start. of the payment term. Then, after a year, that rate rises to 5% for him. 6% the following year; and 7%.

“That means you can buy 3 points for the first year, 2 points for the next year, 1 point for the next year, and the regular rate for the fourth year,” Isaacs elaborated.

Alternatively, the seller can offer a 2-for-1 buydown. For this he has two adjustment periods. 5% initially, 6% after 1 year, 7% after that or market rate.

“A lot of people think interest rates will go down two years from now, so moving into a home at a lower interest rate is a good psychological and financial move,” Isaacs said. Stated.

It’s not new, but it’s growing in popularity, and prices have more than doubled from a year ago.

Generally, these rate buy-downs can be paid by the home buyer with a portion of the down payment set aside, or the home seller or home builder can offer it as a bargaining tactic.

Ari Wolfe, chief economist at Zonda Research, a real estate research firm, told MarketWatch that her company’s data shows an increasing number of builders offering such buy-downs.

“Home sellers are figuring out how to attract and retain buyers in today’s depressed housing market,” said Wolf. “Homebuilders, in particular, are well positioned to offer incentives to help buyers. Incentives come in many forms, including funding options and upgrades, discounts on closing costs, and repurchase of mortgage interest rates. .”

According to Zonda data, more than half of actively selling new home communities are offering incentives as of October, and 80% of home builders are stepping up incentive offerings.

In some cases, Isaacs said, real estate agents working with sellers introduce the idea of ​​offering rate buy-downs. Especially if the house has been on the market longer than usual, the agent will ask the seller if they would like to sell the house at a lower interest rate.

And these agents may come to companies like him for such products.

A year ago, interest rates on mortgages were low, so interest rate cuts were less common, and his company didn’t get any requests.

However, “currently, 3%, 4% of loans have a 2-to-1 buydown, and that number is increasing,” Isaacs said. “If interest rates stay at their current levels, I think they will probably grow to the more common 12% to 15%,” he said.

Aside from these rate buy-downs with builders and sellers, consumers have always been able to lower rates themselves through “points,” Wolff said. That is, pay off points on your mortgage and lower interest rates.

But the market is slowly tilting in favor of buyers, and “the dynamics are changing,” Wolff said.

“Builders are willing to pay points to lower mortgage rates so consumers can afford to buy,” she said. “More affordable prices mean more home sales, so builders are motivated to help.”

“Everyone is asking about ARM”

Another option that is attracting more homebuyers’ attention is the Adjustable Rate Home Loan (ARM). According to the Mortgage Bankers Association’s latest weekly report, ARMs accounted for nearly 12% of mortgage activity.

“Everyone is asking about ARM,” says Isaacs.

30-year mortgages with a loan balance of $647,200 or less averaged 7.06% as of Oct. 28, according to MBA.

The average rate for 5/1 ARM was 5.79%. A 5/1 ARM is a type of mortgage with a fixed rate for the first five years, after which it becomes a variable rate mortgage that adjusts based on market conditions.

“ARM has been stigmatized as a financial crisis because many people lost their homes because they joined ARM,” Isaacs said. “They couldn’t afford the mortgage payments when ARM adjusted.”

But today’s ARM is very different, he stressed. “It’s a pretty safe product these days, as long as you understand the risk of potentially higher payouts,” Isaacs said.

And he said, “If interest rates were the same or higher five years from now than they are now, typically what someone would do when interest rates expire is refinance into another ARM…so you can afford it.” Do something with a certain interest rate and then wait for the market again,” he added.

As MarketWatch reporter Leslie Albrecht wrote earlier this year, ARM can be risky.

Wolf added that some builders are choosing to offer adjustable rate buy-downs. (Regulations now require borrowers to prove they are eligible for the higher payment after mortgage rates are adjusted.)

And if you’re a homebuyer, the best way to get the lowest rates is to call 10 lenders, advised Isaacs. Look up all the lenders out there, call your local bank or local credit union,” says Isaacs.

But “if you’re on bonds or social security, you may not want to use ARM,” he added.

In late September, Sam Cater, chief economist at Freddie Mac (FMCC), gave homebuyers the same advice.

He said the agency’s weekly survey of mortgage rates showed a wide range of quotes for 30-year fixed-rate mortgages. It means it’s become even more important to do,” emphasized Khater.

Thinking about the housing market? Write to MarketWatch reporter Aarthi Swaminathan (aarthi@marketwatch.com).

-Arti Swaminathan


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11-05-22 1025ET

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