How Do Home Buyers Compete in Today's High Interest Rate Market?

How Do Home Buyers Compete in Today's High Interest Rate Market?

In today's real estate market, mortgage interest rates are at a 20 year high, homebuyers are constantly seeking ways to secure more affordable financing options. One strategy gaining popularity is the 3/1 buy down mortgage. Let’s explore what a 3/1 buy down mortgage is and why it can be a sound financial plan in today's high-interest mortgage market.

Understanding the 3/1 Buy Down Mortgage

A 3/1 buy down mortgage is a type of mortgage financing technique where the borrower obtains a lower interest rate for the first three years of their mortgage. This is achieved through a temporary reduction in the interest rate, making it more affordable in the initial years. The structure typically involves a 3% reduction in the interest rate for the first year, followed by 2% in the second year, and 1% in the third year.

Benefits of a 3/1 Buy Down Mortgage

1. Immediate Savings: In a high-interest mortgage market, securing a lower interest rate for the first few years can lead to significant cost savings. This can help borrowers better manage their initial mortgage payments until lower interest rates are achievable through a refinance.
2. Affordability: The gradual increase in interest rates over the first three years allows borrowers time to adjust to their mortgage payments. This is especially beneficial for those who anticipate higher income in the future.
3. Competitive Advantage: With rising interest rates, homebuyers who choose a 3/1 buy down mortgage may have a competitive edge in the real estate market, as they can buy now while many buyers stay on the sideline.
4. Avoid the future buying frenzy: Many buyers are willing to sit on the sidelines and wait until interest rates decrease. Unfortunately, this strategy may not be financially beneficial here’s why; Once rates drop, this will create another buyer’s frenzy we previously experienced during the covid years. This frenzy has previously induced a seller’s market where buyers were willing to pay well over market value, waiving inspections and required to provide appraisal gap protection to the Sellers. The two major factors that directly affect your payment is the price and the interest rate. Even if you wait for a lower interest rate but are required to pay $30,000 more for the home due to future competition, your payment could be the same if you had an 8% interest rate today. Utilizing the buydown is a way to secure the home today while we wait for the lower interest rate tomorrow.
5. Potentially zero cost to the Buyer: In today’s market sellers are sitting on tons of equity while their home continues to sit on the market without selling. Many are willing to pay for the buyers cost of the 3/1 Buydown. (Ask me how we can structure this in a contract offer of your new home!) The best part is the money used in the buydown is still yours. If you refinance prior to using all these funds, they can be used to pay for the cost of the refinance when interest rates decrease back to manageable levels.
6. If your home isn’t selling: Offering to pay for the Buyers 3/1, 2/1, or even a 1/1 buydown can be a strategy to sell your home fast while still receiving top dollar. (Ask me how!)

Is it time to get off the fence?

Points to Remember:

• Rate relief is coming
• Loan amount matters more than interest rate
• Today’s Market: Less expensive home at a higher interest rate.
• Tomorrows Market: More expensive home at a lower interest rate.
• You need to be able to afford your payment (not love it)
• Less competition for fewer homes today. Colorado will continue to have low inventory for the foreseeable future.
• What will you need to pay tomorrow for the same home, when we factor in the annual appreciation and more competition when rate relief does happen?

In conclusion, a 3/1 buy down mortgage can be a prudent financial strategy in today's high-interest market. It provides immediate savings, increased affordability, and a competitive edge. However, careful financial planning is necessary to ensure you can manage the higher payments and remain committed to refinancing. Let’s discuss your individual situation today and analyze if a buydown is right for you,