America’s real estate market is coming to a halt as high mortgage rates keep potential buyers from moving.
The 30-year deal average rose to a nearly two-month high of 6.43 percent this week, causing home loan applications to drop 10 percent.
But is all this doom and gloom? After two years of a frantic seller’s market, experts say buyers now have more power when negotiating a deal.
This has led to an increase in mortgage rate purchases – a financial technology that can shave thousands of dollars off a buyer’s loan payment.
Purchases involve the seller agreeing to pay a lump sum of money which is then used to lower the buyer’s interest rate over a specified period of time.
Increasingly, many are turning to this tactic to help ease buyers’ concerns about homeownership costs and get sales through the line.
Experts say more and more homebuyers are negotiating a mortgage purchase to ease their concerns about high interest rates. The photo is a stock photo of a home and not one to be sold by purchase
These negotiations are often cut short when the home has been on the market too long and the sellers are struggling to find a buyer.
It may be less costly for them to agree to this type of deal than to lower the price of their property.
“Purchases really haven’t been possible over the past few years because mortgage rates have been so low that it wasn’t an issue for buyers,” said mortgage broker Adam Smith, who runs Colorado Mortgage Group (CORE).
“But now we’re seeing more and more sellers considering it because a lot of people are delaying because mortgage rates are increasing.”
The cost of the purchase is covered by the seller’s profit from the sale of the house and deals are divided into two types: permanent and temporary.
Temporary purchases – which are more common – see sellers paying a lower mortgage rate in the first year or two after the sale.
The homeowner is then responsible for the full price.
Adam Smith, a Colorado mortgage expert, said he recently saw a buyer negotiating a purchase that saved them $12,000 over two years.
However, a perpetual purchase—which is much more profitable for the buyer but more expensive for the seller—is when the price of the entire mortgage is lowered.
Common ways to structure a deal are three-year, two-year, and one-year buybacks.
Referred to in the industry as: 3-2-1, 2-1 and 1-0 deals.
In a 3-2-1, the rate is significantly reduced for the first year, partially reduced for the second and third years and then returned to the original rate in the fourth year.
For example, a buyer could insure a 6% mortgage and purchase a 3-2-1.
In the first year, they may only pay 3 percent on the mortgage before it increases to 4 percent in the second year and 5 percent in the third year.
By the fourth year, the mortgage will then return to the original six percent rate.
The 2-1 purchase process is similar but only spread over two years.
So the buyer might pay at the rate of six percent 4 percent for the first year and five percent the second year.
They’ll then go back to paying the full six percent in the third year until the end of the mortgage—unless they refinance it.
Smith says he recently negotiated a 2-1 purchase with a client that saved the buyers $12,000 over two years.
Buyers bought a $700,000 home and a $550,000 mortgage at 5.875 percent interest.
Loan expert Andrew Boyd says purchases are more likely if the home has been on the market for a long time
But the sellers agreed to pay $12,000 as part of the purchase.
As a result, buyers will pay 3.875 percent in the first year of the mortgage — which will rise to 4.875 percent in the second year.
By year three, the couple will be back at a 5.875 percent deal — at which point they may decide to refinance if rates are lower.
Loan expert Andrew Boyd, who runs comparison site Finty, said that in a typical deal, buyers can save $627 in their first month.
He gave the example of a 30-year mortgage for $500,000 at a rate of 6.5 percent.
With Buy 2.1, he says new homeowners can only pay 4.5 percent in the first year.
It will reduce her monthly payment from $3,160 to $2,533 in the first year.
Up to $7,524 in just one year.
Mortgage rates rose at their fastest pace in nearly two months, according to the Mortgage Bankers Association (MBA).
By the second year, the interest may increase to 5.5 percent, at which point the monthly payments will cost $2,839.
Buyer still saves $321 per month — or $3,852 per year.
But Boyd added that purchases require a lot of successful negotiation.
“You’re more likely to get a deal across the line on a home that’s been on the market for some time or if the seller has been under pressure to sell,” he said.
