Last updated on October 24th, 2024 at 02:15 pm

Last Updated on October 24, 2024 by

While mortgage interest rates are nowhere near a historic high, they are for at least two generations of Americans who have not seen 7%. At the same time as interest rates have risen from historic lows in the 2% range, home prices have risen. In fact, during a recent two-year period, prices rose higher and faster than at any time in history. In come interest rate buydowns which are popular now in 2024 and will be in 2025.

A great reason why sellers and buyers need the assistance of real estate agents is to learn about the financial aspects of buying and selling their home. Even sellers who get the big check may be required to pay taxes if they are not residents of the state where the property was sold. Buyers need information about financing their house, down payment and more.

For those of you who made it through the very rough time in the 1970s when interest rates rose to about 17% and home prices were high as well, innovation came to the rescue. I am not sure that the situation now is a bit better than it was the last go around. It’s all about perception. The chart below indicates the last 25 years of rates. Note that current rates which are now slipping are lower than they were in 2000.

Learn about financing

Real Estate Agents need to have a very good working knowledge of the finance business to be successful. Years ago people made offers without going through the pre-review stages and sales fell through.

After the crisis that moved us through 2007-2011 and changes in real estate financing, most agents today will not work with a buyer who is not pre-approved for a loan. The process to get them pre-approved means a lot of work on the buyer’s end prior to even shopping for a home. Buyers need to make sure they have no skeletons in the closet.

Why would an interest rate buydowns help get a property sold in a market with higher interest rates and higher selling prices?

1. Interest rate buydowns Attract More Buyers:

• Increases affordability: By offering a lower interest rate for the first few years, the property becomes more attractive to a wider range of buyers, especially those with tighter budgets.
• Speeds up the sale: A lower monthly payment can entice buyers to make an offer sooner, reducing the time the property spends on the market.

2. To Command a Higher Sale Price:

• Justifies higher price: While offering a buy-down might reduce the seller’s net proceeds, it can allow them to list the property at a higher price point.
• Competitive advantage: In a competitive market, offering a buy-down can differentiate the property from similar listings.

3. To Address Market Conditions:

• Slow market: A buy-down can stimulate interest in a property when the market is sluggish.
• High-interest rate environment: By offsetting the impact of higher interest rates, a buy-down can make the property more appealing.

4. Interest rate buydowns help to Facilitate Negotiations:

• Sweetener: A buydown can be used as a bargaining chip to entice buyers to accept the seller’s terms.
• Counteroffer: If a buyer is hesitant to meet the asking price, offering a buy-down can be a way to bridge the gap.

How long will the buyer stay in the home?

Here is a chart listing the average number of years a buyer owns their house before selling it, based on general trends in the United States:

Note: These values are averages and can vary depending on economic conditions, location, and other factors. Recent trends indicate that people are staying in their homes longer than in previous decades.

Calculate the value of a buydowns based on the estimated number of years they will stay in their house. Interest rates move up and down over time. In 2023, rates were in the high 7% range. As of October, they are as low as 5.875%. People who bought down their rates one year ago would have done better by waiting except that no one has a crystal ball. It was generally accepted that rates would decline from the high 7% rate but the when and how much were unknown.

Trends

It’s best to watch trends. For example in July 2024, the trend was that rates would drop further. By October we know they continued to edge down for the previous months. The FED reduced their rates which indicated downward pressure on mortgage interest rates. It seems the trend is for further reduction in rates rather than for rates to climb. Buyers can wait for lower rates or determine that rates now are much better than they were and holding off may not result in the best benefit to them.

30 Year Fixed Rate Mortgage Chart

Take a look and share with your clients. For the past 30 years, the average mortgage interest rate for a 30 year fixed mortgage is in the high 6% range. Many buyers believe rates should be in the 2021 range but that is a clear aboration.