As rising mortgage rates hit home sales, many “Zoom cities,” areas that have prosperedthanks to an influx of remote workers, they are seeing their real estate markets cool off. That leads sellers to be creative and gives buyers a bit of leverage in finding a home.
A new strategy is making headway: mortgage “buyback,” which can help buyers get a slightly lower mortgage rate than the 6% or 7% interest rate on most home loans today.
Taylor Marr, Redfin’s deputy chief economist, explained how this works on CBS News Mornings. In a “2-for-1” purchase, a common arrangement, a buyer can secure a lower rate for the first two years of the loan by depositing additional funds.
“If you’re buying a $500,000 home, you could put down an extra $10,000 or $20,000 to temporarily pay off your mortgage rate,” he said. “If you get a 6% mortgage rate, for the first year you actually get 4%. And then it goes up to 5%, then 6%,” she said.
“It can be a great way to pay for a house if your income is growing quickly. But you have to put more money up front,” Marr added.
Buybacks are becoming more popular in some areas where home sales are slowing, but they are just one of several concessions sellers can make to push a deal over the line. Other sweeteners could include putting up some money for repairs or offering to pay the buyer’s closing costs, Marr said.
In fact, sellers offered a record share of concessions in the last three months of 2022, according to Redfin data. About 42% of the firm’s agent sales included a concession, according to a recently published report. Some sellers also have to lower prices entirely, and Marr notes that about half of recent home sales closed below asking price.
Concessions are more common in the West, Redfin found. Nearly three-quarters of home sales in San Diego had a dealership last quarter, followed by Phoenix, Portland, Las Vegas and Denver.
“The housing market frenzy fueled by the pandemic was concentrated in many of these booming pandemic cities that were mostly in the West,” Marr said. “These are the same markets that have cooled off quickly when [interest] rates went up. They have to make more and more concessions so buyers can buy a house.”
Mortgage rates have nearly doubled where they were at the start of 2022 as the Federal Reserve raises interest rates in its bid to rein in inflation. The run-up has added hundreds of dollars to prospective homebuyers’ typical monthly payment and pushed home sales to their lowest level in eight years.