DENVER–Mortgage rate buydowns that enticed many reluctant homebuyers in recent years to take the plunge on homeownership are coming back to bite many of those same buyers, according to a new report.
Mortgage-rate buydowns are a financing maneuver in which the builder fronts some cash to help buyers get a lower borrowing rate from the builder’s in-house lender, often for just a few years, Business Insider Reported, adding the incentive is designed to help buyers stretch their budgets and soften the blow of higher mortgage rates.
‘Fail Spectacularly’
“Homeowners who got temporary buydowns in 2022 or 2023 have seen their gamble on rates fail spectacularly,” Business Insider reported. “The typical mortgage rate still hovers above 6.5% — roughly around the levels that many buyers back then were hoping to dodge. Given the slowing market, industry analysts, and even some executives, warn that these homeowners could see little in the way of equity gains before the full cost of the mortgage hits. If those buyers try to turn around and sell soon, they may end up having to slash the price just to push a deal through.”
The report noted that Rick Palacios Jr., the director of research at John Burns Research and Consulting, has been sounding the alarm about the growing risks for buydown takers since last summer.
“People are going to start putting those homes back into the market,” Palacios told Business Insider, “and I think it’s going to be a bit of a shock to them, what they have to reprice at.”
More Than a Niche
Business Insider noted that the popularity of the deals soared alongside mortgage rates.
“In April 2021, just 17% of mortgage borrowers got a permanent buydown of one percentage point or more, data from ICE Mortgage Technology, a real estate software firm, shows,” it reported. “By the same point in 2023, that share had surged to nearly 45%. Temporary buydowns are more niche — they accounted for almost 5% of mortgage originations in late 2023, but have mostly hovered in the low single digits over the past few years…
“Last fall, Zillow published the results of a survey showing that 45% of buyers who purchased a home in the past year nabbed a mortgage rate below 5%, despite rates trending significantly higher,” the report continued. “More than a third of those buyers said they got a lower rate because the seller or homebuilder offered them a deal on the mortgage.”
