Industry News

Builders use buydown incentives to attract buyers

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Three of every four home builders are buying down buyers’ mortgage rates, according to a survey by John Burns Real Estate Consulting. Builders are paying the costs up front by prepaying some of the buyers’ interest on the loan, thereby effectively reducing monthly payments and making the purchase more affordable.

Builders who took part in the survey said incentives are a necessity in today’s sales environment. The most popular promotions seem to be rate buydowns and/or rate locks.

About a third of the builders (32%) indicated they are buying down the full 30-year terms, while another 30% said they are reducing the rate for the first two years of the mortgage. About 13% of respondents identified other less common buydowns.

The researchers from Burns Real Estate said two popular strategies to lower the mortgage rate for the buyer are the 30-year rate buydown and the 2-1 temporary rate buydown.

In their report of the findings, researchers at the Burns firm noted Fannie Mae and Freddie Mac limit temporary rate buydowns to three years and the rate cannot step up more than 1% each year. Also, builders pay upfront for points to buy down the rate for the term of the loan, with the cost typically being 1% of the loan amount for each 0.25% reduction in the rate.

With the first method, builders contribute 5% to 6% of the home purchase price up front to lower the 30-year mortgage rate by one or two points. Using a recent Freddie Mac mortgage rate of 6.5%, their example indicated a builder might reduce that rate to 5.0%.

Using the 2-1 temporary rate buydown, builders contribute 2% of the purchase price upfront, thereby lowering the first-year mortgage rate by 2% and the second-year rate by 1%. That lowers a 6.5% rate to 4.5% in year one, and then to 5.5% in year two. Thereafter, it rises to 6.5%. Borrowers still must qualify at the 6.5% rate to realize the benefits.

Researchers compared incentives across regions, noting areas with the weakest new home sales have the highest percentages of builders who are using rate buydowns.

Nationally, about 75% of respondents reported using rate buydowns, with the Southwest having the highest use at 87%, followed by Texas at 81%. The Northwest was slightly higher than the national average, with about 77% of builders using buydown incentives.

Florida, the Northeast and the Midwest were lower than the national average.

Researchers also analyzed builders’ costs to buy down rates. Amounts vary widely depending on the loan amount, the buyer’s down payment, the type of loan and the term of the buydown. Current costs reportedly range from around $6,000 to as much as $48,000.

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