Interest rates on home loans have doubled from a year ago, making buying a home much more expensive. Door-to-door salesmen try to help them.
Buyers are not feeling the market, which lowers the demand for mortgages. Rates hover around 7%, adding hundreds of dollars in extra monthly payments to potential buyers’ budgets.
Although the number of homes for sale is increasing, they remain expensive, creating affordability issues for buyers.
Some builders and sellers are getting more creative, offering potential buyers ways to lower their mortgage rates and monthly payments.
“There are programs today, like what’s called a 2-1 buyout or a 3-2-1 buyout,” Michael Isaacs, CEO of GO Mortgage, told CNET on the sidelines of the company’s annual conference. Mortgage Bankers Association in Nashville, Tennessee, last week.
2-1 and 3-2-1 rate buyouts are mortgage products that offer lower rates for the first few years of repayment, after which they are permanently reset to the higher market rate.
Mortgage purchases, in particular, are becoming popular, especially as housing costs have risen dramatically, she added.
The temporary 3-2-1 buyback works like this: When a seller or developer pays a certain amount in advance to buy back the rate, this rate goes from 7% – where it is today – to 4% at the start of the Payment Period. Then, after one year, this rate increases to 5%; the following year 6%; then 7%.
“So you can buy it down 3 points the first year, 2 points the next year, 1 point and then in the fourth year it goes back to its normal rate,” Isaacs explained.
““Because many people think rates will be lower in two years, it’s a good way, both psychologically and financially, to get into a house at a lower starting price than it is today.”“
Or a seller can offer a 2-1 buyout, which has two adjustment periods: it starts at 5%, then 6% after one year, then 7% or market rate.
“Because many people think prices will be lower in two years, it’s a good way, both psychologically and financially, to get into a house at a lower starting price than it is today,” he said. Isaacs said.
These are not new products, but they are growing in popularity as prices are now more than double what they were a year ago.
Typically, these appraisal purchases are paid for by the home buyer, where they set aside a portion of their down payment, or the seller or home builder may offer it as a negotiating tactic.
Ali Wolf, chief economist at Zonda Research, a real estate research firm, told Roadshow that his firm’s data showed an increase in the number of developers offering these acquisitions.
“Home sellers are looking to attract and retain buyers in today’s slow real estate market,” Wolf said. “Homebuilders, in particular, are able to offer incentives to help buyers. Incentives come in many forms, including funds for options and upgrades, reduced closing costs and mortgage buyouts.
““Home sellers are looking to attract and retain buyers in today’s slower housing market. Home builders in particular are able to offer incentives to help buyers.“
Zonda data shows that more than half of actively selling new home communities offer incentives in October, Wolf said, and 80% of homebuilders are increasing their incentive offers.
Isaacs said that in some cases, realtors working with sellers introduce the idea of offering an installment buyout. Especially if the house is on the market longer than usual, the broker asks the seller if he wants to market the house at a lower interest rate.
And these agents sometimes come to companies like his to ask for such products.
A year ago, interest buybacks weren’t as common because of low mortgage rates, so his company didn’t receive any requests.
But “today, 3%, 4% of our loans have a 2-1 buyout, but that’s growing,” Isaacs said. “And if prices stay where they are now, I think that will go up until they’re probably much more common, 12% to 15%.”
In addition to these rate buybacks done with builders and sellers, consumers have always had the ability to lower their rate themselves through “points,” Wolf noted. In other words, pay off your mortgage points and lower the rate.
But as the market slowly shifts in favor of buyers, “the dynamic is changing,” Wolf said.
“Builders are willing to pay the points to buy back mortgage interest to help consumers stay affordable,” she said. “Better affordability means more home sales, so builders have an incentive to help.”
“Everyone is asking about an ARM”
Another option that more and more homebuyers are turning to is adjustable rate mortgages, or ARMs. According to the Mortgage Bankers Association’s latest weekly report, ARMs accounted for nearly 12% of mortgage activity.
“Everybody asks about an MRA,” Isaacs said.
The 30-year mortgage with a loan balance of $647,200 or less averaged 7.06% per annum. October 28, MBA said.
The average rate for ARM 5/1 was 5.79%. A 5/1 ARM is a type of mortgage that has a fixed interest rate for the first five years, after which it becomes a variable rate mortgage that is adjusted according to market conditions.
“ARMs are stigmatized by the financial crisis because a lot of people lost their homes because they got into an ARM,” Isaacs said. “When ARM adjusted, they couldn’t pay their mortgage.”
“A variable-rate mortgage has a fixed interest rate for the first five years, after which it becomes a variable-rate mortgage, which is adjusted according to market conditions.“
But today’s ARM is very different, he pointed out. “It’s a pretty safe product today, as long as you understand the risks, your payout can increase,” Isaacs said.
And “if the rates in five years are the same or higher than they are today, usually what someone would do when your rate expires, they’ll just refinance to another ARM…whatever rate you can afford to, and then wait for the market again,” he added.
ARMs can be risky, especially if the mortgage borrower sees their payment increase at the end of the fixed and lower rate period, as CNET reporter Leslie Albrecht wrote earlier this year.
Some builders choose to offer a variable rate buyout, Wolf added. (The rules now require borrowers to prove they can qualify for the higher payments when mortgage rates adjust.)
And if you’re a home buyer, the best way to get the lowest rate is to call 10 lenders, Isaacs advised. “Call 10 lenders. Go online. Look at every lender out there — call your local banks, local credit unions,” Isaacs said.
But “if you’re on a fixed income, Social Security, you might not want to do an ARM,” he added.
In late September, Freddie Mac’s FMCC,
chief economist Sam Khater, had the same advice for home buyers.
He said the agency’s weekly mortgage survey showed a wide range of offers for the 30-year fixed-rate mortgage. “The wide spread in prices means it has become even more important for homebuyers to shop around with different lenders,” Khater pointed out.
Do you have ideas for the housing market? Write to CNET reporter Aarthi Swaminathan at [email protected]