Mortgage surrender is making a comeback as interest rates remain high

Anna Raymond was ready last spring to make the transition from renting to owning a home. But after five failed offers, she and her husband decided to take a step back from house hunting.

Then, in December, their broker presented an offer that was too good to pass up. A house in Longmont was for sale and the seller was willing to offer a 2-1 interest rate buyout.

The concession would reduce Raymonds’ contract interest rate of 5.75% by 2% in the first year and 1% in the second year, so that they pay only 3.75% interest in the first year and 4.75% in the second year before returning to 5.75% in the third. Raymond said they expect to save about $250 a month during their first year as a homeowner.

“I think for them they just wanted a quick sale and for us we wanted a good price. And so we could both be happy in the process,” said 28-year-old Raymond. refinance and, in the worst case, if we don’t, our salaries will catch up.”

While buyers cannot be sure that interest rates will drop by the time they are ready to refinance, buying off the mortgage interest has become a popular strategy for attracting buyers who might otherwise be hesitant to buy a home under the current high interest rates.

What are mortgage interest payments?

A recent report from RedFin found a record number of vendor concessions in the fourth quarter — offers such as cutting mortgage interest deductions to lower costs — especially among cooling “pandemic boomtowns” like Phoenix and Las Vegas.

“About nearly 100% of the clients I’ve had the pleasure of working with since the fourth quarter of last year, even today, are charging that rate of interest on the seller’s concession,” says Connect Vastgoed’s San Diego-based realtor Andre Mejia. “The market has finally shifted.”

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Is buying off mortgages worth it?

With high interest rates depressing demand for housing, the days of profuse bidding wars and always-high listing prices are over.

“Sellers don’t want their homes for sale,” said Bud Kawa, a Detroit-based real estate agent with Brick and Stone Real Estate. “They are more willing to help buyers than they were last year.”

Buyers received concessions in 42% of fourth-quarter home sales, according to RedFin’s January report. It’s the highest quarterly share since at least July 2020, when the brokerage started keeping records.

“We still have some demand, but homes are staying on the market significantly longer than people have been accustomed to,” Washington-based realtor Howard Veal of Home Realty Ventures at Keller Williams Puget Sound told USA TODAY. “So the lenders, as they often do, got creative.”

While the majority of buydowns are negotiated between buyers and lenders, sellers and builders can also offer the concession to attract buyers without lowering the listing price. It can be a big boost after rate hikes; the average 30-year fixed-rate mortgage rate as of Thursday was 6.15%, up from 3.56% in the same week a year ago, according to Freddie Mac.

‘Maybe you need to lay new carpet, you want to paint, you have appliances you want to buy. (A buydown) keeps money in your pocket so you can invest in things that as a homebuyer you think you might need to do,” said Bill Banfield, executive vice president of capital markets for Rocket Mortgage. The lender began doing it last year. offering a temporary 1-0 buydown, referred to as the “inflation buster”.

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How does the mortgage interest deduction commute work?

Some common types of buydowns are:

The 1-0 buydown, where the contract rate drops 1% for the first year of the loan.
The 2-1 buydown, where the rate drops 2% the first year and 1% the second year before returning to the contract rate in the third year.
The 3-2-1 buydown, where interest rates fall 3% the first year, 2% the second year, and 1% the third year before returning to the contract rate in the fourth year.

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