Why Today's Housing Market May Be Better Than When Rates Were 3%

What would you say to someone who is sitting on the sidelines because the headlines are telling them that mortgage rates are too high?

But when rates were extremely low, buyers often faced bidding wars.

Who might be a good candidate for this strategy?

It may work well for a buyer with stable income who has found the right long-term property but wants to reduce expenses during the first few years.

Welcome to another edition of Mortgage Minute, where we help home buyers and homeowners understand what is happening in the mortgage and real estate markets and more importantly, what it could mean for them. I'm Jeff Harrison, and joining me today is Art Alvarez from MortgageWorks. Art has more than 4 decades of experience in the mortgage industry, and one of the things I appreciate most about him is that he doesn't just look at the headline numbers. He looks at the entire transaction and helps buyers understand how all the pieces work together. Art, welcome back.

Thank you, Jeff. It's always good to be here. And you're right, the interest rate is important, but it's only one part of the home buying decision. Sometimes people become so focused on the rate that they overlook opportunities in the price, the seller's motivation, the closing costs, and the overall structure of the transaction. That's especially important in the market we're seeing right now.

Let's begin with the headline that has many buyers concerned. Recent economic reports show that average 30-year fixed mortgage rates have been running somewhere around 6.6% to 6.8%. What are you seeing and how should buyers interpret those national averages?

The first thing buyers should understand is that a national mortgage rate average is exactly that. An average. It includes many different borrowers, loan amounts, property types, credit profiles, down payments, and geographic areas. The rate available to an individual buyer can be higher or lower depending on that buyer's specific situation. At MortgageWorks, we currently have options that may compare favorably with those national averages, but every loan has to be evaluated individually. A buyer's credit score, down payment, loan program, occupancy, property type, and whether the rate includes discount points can all affect the final numbers. So I don't want someone to look at one advertised number and assume that is automatically the rate they will receive. The better approach is to review their complete financial picture and compare the available options.

When buyers hear that mortgage rates are at their highest levels in more than a year, their first reaction may be, maybe I should stop looking and wait. Is waiting always the right answer?

No, it may be the right decision for some people, but it is not automatically the right decision for everyone. The problem with waiting is that we don't know exactly what will happen next. Rates could come down, remain in the same general range, or move higher. Home prices could also change. Buyer competition could return very quickly if rates decline. A buyer has to look at what is available today and decide whether the complete transaction makes sense. That includes the price of the home, the monthly payment, the amount of cash needed at closing. The condition of the property and how long the buyer plans to own it. The question shouldn't only be, what is today's rate? The better question is, can we structure a transaction today that makes sense for my budget and my long-term goals?

That brings us to the other side of the market. Buyer demand has slowed, home price growth has cooled, inventory has improved, and some homes are staying on the market longer. How does that change the conversation for a buyer?

It may give the buyer more negotiating power. During the extremely competitive market a few years ago, buyers were often competing against multiple offers. Some were offering more than the asking price, shortening inspection periods, or agreeing to terms that strongly favored the seller. In that environment, asking the seller to contribute toward closing costs or rate buydown was often difficult. Today, conditions can be very different. Some sellers may have had their property listed for several weeks without receiving the offer they expected. Others may already be purchasing another home, relocating for work, or carrying the expenses of an empty property. That doesn't mean every seller will negotiate, but it does mean more sellers may be willing to have the conversation. A prepared buyer may be able to negotiate the price, repairs, closing cost assistance, or a contribution toward a temporary interest rate buydown.

Let's talk about seller motivation. When a home has been sitting on the market, does the seller sometimes become more anxious to make a deal?

Absolutely. Every seller has a different reason for selling. Some sellers are simply testing the market and are willing to wait. Others may need to complete the sale within a certain period. A seller may be relocating, they may have already purchased another property, uh, the home could be part of an estate, they could be dealing with a divorce, a job change, or the cost of maintaining two homes. As the listing sits, that seller may become more focused on certainty. They may decide that helping a qualified buyer with closing costs or a temporary buydown is worth it if it creates a solid transaction and a dependable closing. That is why the buyer, the real estate agent, and the mortgage professional should communicate before the offer is written. We want to understand the buyer's needs and then determine whether the offer can be structured in a way that works for both sides.

One of the terms buyers hear is seller concession. Explain that in plain English.

A seller concession is an agreement in which the seller contributes money towards certain eligible expenses for the buyer. Depending on the loan program and the details of the transaction, the contribution may be used toward allowable closing costs, prepaid expenses, discount points, or the cost of a temporary rate buydown. The buyer is not simply handed cash. The concession has to be written into the purchase agreement. Approved under the applicable loan guidelines and applied toward eligible costs at closing. There are also limits on how much a seller can contribute. Those limits can vary based on the type of loan, the down payment, and other factors. That is why we need to calculate the concession before the buyer writes the offer. We don't want the buyer asking for too little, asking for more than the guidelines permit, or negotiating money that cannot actually be used.

Suppose a seller is willing to give up $10,000 or $15,000 to complete the sale. Why might it be more valuable to use some of that money for closing costs or a temporary buydown rather than simply lowering the sales price by the same amount?

That is a very important question. A price reduction sounds attractive, but a relatively modest reduction in the purchase price may not dramatically change the monthly payment. For example, reducing a home's price by $10,000 does not reduce the mortgage payment by $10,000. That reduction is spread over the entire term of the loan. Depending on the rate and loan structure, the monthly savings from that price reduction may be relatively modest. But if that same amount can be used toward eligible closing costs, it could significantly reduce the amount of cash the buyer needs at closing. If it is used to fund a temporary rate buydown, it could provide more noticeable payment relief during the first 1, 2, or 3 years. This doesn't mean a concession is always better than a price reduction. We need to compare both options. The point is that buyers should look at how each dollar affects the complete transaction instead of automatically assuming that lowering the price is the only answer.

Let's explain one of the most common temporary buydown structures, the 2:1 buydown. How does it work?

With a typical 2:1 temporary buydown, the buyer has a permanent note rate, but the payment is temporarily reduced during the first 2 years. During the first year, the buyer's principal and interest payment is calculated as though the interest rate were 2 percentage points below the permanent note rate. Rate. During the second year, the payment is calculated as though the rate were one percentage point below the note rate. Beginning in the third year, the buyer makes the full payment based on the permanent note rate. Let's use a simple example. Suppose the permanent note rate is 6.5%. During the first year, the payment would be based on a temporary payment rate of 4.5%. During the second year, it would be based on 5.5%. Beginning in the third year, the payment would be based on the full 6.5% note rate. The note rate itself does not change. The temporary buydown funds are used to make up the difference between the reduced payment and the full scheduled payment.

MortgageWorks also offers a 3-2-1 temporary buydown option. How is that different?

A 3-2-1 buydown provides payment assistance over 3 years instead of 2. Using that same hypothetical permanent note rate of 6.5%, the first-year payment could be calculated at 3.5%. The second year payment could be calculated at 4.5%. The third year payment could be calculated at 5.5%. Beginning in the fourth year, the payment would be based on the full 6.5% note rate. Again, those are temporary payment calculations. The borrower's permanent note rate remains 6.5% in this example. The advantage is that the buyer receives a gradual transition into the full payment. That may be helpful for someone who wants to preserve cash after closing. Expects their income to grow, or simply wants lower housing expenses during the first few years of ownership. But the buyer still needs to understand and be comfortable with the full payment.

Where does the money for the temporary payment reduction come from? Can the seller pay for it?

In many transactions, the seller can contribute toward the cost of the temporary buydown, subject to the loan program's rules and contribution limits. A builder may also offer a temporary buydown as an incentive on a new home. The funds are generally deposited into a designated buydown account at closing. Each month, a portion of those funds supplements the reduced payment made by the borrower. For example, if the full scheduled principal and interest payment is $3,000, but the temporary first-year payment is $2,500, the borrower pays the $2,500 and the buydown account supplies the remaining $500. The servicer still receives the full scheduled payment. The important thing is that the cost has to be calculated accurately, documented properly, and approved before closing.

Let's put all of this together. Rates are higher than many buyers would like. Demand has slowed, price growth has cooled, and some sellers are becoming more motivated. Does that combination create an opportunity for a qualified buyer?

It certainly can. A buyer may be able to approach a motivated seller with a strong, well-structured offer. Instead of simply asking the seller to accept a much lower price, the buyer could agree to a reasonable purchase price while requesting a contribution toward eligible closing costs or a temporary buydown. That structure may appeal to a seller because it helps preserve the contracted sales price. It may appeal to the buyer because it reduces the cash needed at closing or provides temporary monthly payment relief. The key is to run the numbers before making the offer. We need to determine how much the buydown will cost, whether the seller's contribution falls within the guidelines, and how the buyer's payment will change each year. When everyone understands the numbers, the buyer and the real estate agent can negotiate with much more confidence.

Some buyers may be thinking, what if I use a temporary buydown now and mortgage rates come down a year or two later? Could they refinance?

Potentially, yes. If rates decline and refinancing makes financial sense, the homeowner could explore that option. But I want to be very careful here. No lender should promise that a buyer will be able to refinance. Future rates are unknown. The homeowner's income, credit, equity, property value, and financial situation can also change. Refinancing also has costs, so the savings have to justify those expenses. We can discuss the possibility, but the buyer should never purchase a home based on the assumption that refinancing is guaranteed. The buyer must qualify for the current loan and should be comfortable with the permanent payment from the beginning. If refinancing becomes beneficial later, that is an additional opportunity, not the foundation of the original decision.

That distinction is important. A temporary buydown is not the same as receiving a permanently lower interest rate, correct?

Correct. The word temporary is extremely important. The payment reduction lasts for a specific period. After that period, the borrower is responsible for the full payment based on the permanent note rate. Before moving forward, the buyer should review the payment for every stage of the buydown. They should know the first year payment, the second year payment, the third year payment if applicable, and the final full payment. They also need to include property taxes, homeowners insurance, mortgage insurance when applicable, homeowners association dues, and other ownership expenses. We don't want buyers qualifying emotionally based on the lowest introductory payment. We want them making an informed decision based on the entire financial obligation.

Who might be a good candidate for this strategy?

It may work well for a buyer with stable income who has found the right long-term property but wants to reduce expenses during the first few years. It could help someone who expects their income to increase, such as a professional early in their career, provided the current income is already sufficient to qualify. It may also appeal to a buyer who wants to preserve savings after closing for improvements, furniture, moving expenses, or an emergency reserve. Another possible candidate is someone purchasing from a motivated seller who is willing to provide a meaningful concession, but it is not right for everyone. Some buyers may be better served by negotiating a lower price. Others may prefer to use seller funds to reduce their closing costs or purchase permanent discount points. Our job is to compare the available strategies and help the buyer understand the advantages, costs, and risks of each one.

Before a buyer asks their real estate agent to request a seller concession or temporary buydown, what should they do with you first?

They should contact us before the offer is written. Uh, we can review their qualifications and calculate several different scenarios. We can show them the standard fixed rate payment, the temporary buydown payments, the estimated cost of the buydown, and the amount of seller contribution that may be permitted. We can also compare that strategy with a price reduction, closing closing cost assistance, or permanent discount points. Then the buyer can speak with their real estate agent and decide how to structure the offer. That preparation is important because the strongest offers are not always the offers with the highest price. A strong offer is one that is realistic, properly financed, and structured in a way that gives both the buyer and the seller confidence that the transaction can close.

Art, let me close with this. What would you say to someone who is sitting on the sidelines because the headlines are telling them that mortgage rates are too high?

I would tell them not to make a major financial decision based solely on a headline. Yes, rates are higher than they were during the pandemic. We all understand that. But when rates were extremely low, buyers often faced bidding wars, rapidly increasing prices, and very little negotiating power. Today, buyers may have more homes to choose from, more time to evaluate a property, and a better opportunity to negotiate with the seller. A higher mortgage rate combined with a reasonable purchase price, seller-paid closing costs, and a temporary buydown may produce a better overall transaction than a lower rate combined with an inflated price and intense competition. That doesn't mean everyone should buy a home today. It means buyers should examine the complete opportunity. Sit down with an experienced mortgage professional, review the real payment, understand the cash needed at closing, Compare the available strategies and then decide whether the transaction works for your family and your financial goals. The best decision is an informed decision.

Art, that is excellent advice. The interest rate matters, but so do the price you pay, the competition you face, the cash you need at closing, and the concessions you may be able to negotiate. A slower market can create opportunities that buyers may not see if they are only watching the headline rate. Before writing an offer, contact Art Alvarez and MortgageWorks to find out whether a seller concession, closing cost credit, 2-1 buydown, or 3-2-1 buydown could work for your situation. Visit mwloan.com to learn more and connect with Art. Art, as always, thank you for helping us look beyond the headlines.

Thank you, Jeff. I appreciate the opportunity, and I encourage buyers to ask questions before they make an offer. A short conversation A conversation and a clear comparison of the numbers can make a significant difference.

That does it for this edition of Mortgage Minute. Thank you for watching and listening. We'll see you next time.