With fixed-rate mortgages reaching 20-year highs, Pensacola Area lenders are seeing an emergence in new financing techniques such as 3/2/1 buydowns.
The new approach allows buyers to reduce their interest rate payments by 3% during the first year, 2% in the second year, and 1% in the third year, with regular interest payments resuming after that.
“That’s an exciting strategy that is pretty popular right now,” said Charles Stallions. “We anticipate that rates will come down over the next couple of years. Obviously, there’s not a guarantee … but if [buyers] can kind of make it through those first couple of years, then the seller doesn’t have to reduce the value of their house, and they give it in the form of a credit to the buyer.” They can refinance when interest rates come down.
The national weekly average for 30-year fixed-rate mortgages continued climbing over the past week, hitting 7.79% as of Oct. 26. And while a recent report showed the share of adjustable-rate mortgage applications was the highest since November 2022.
“If I go to price an adjustable-rate mortgage, those rates are actually on the higher side than the 30-year fixed … nobody’s asking for an adjustable-rate mortgage also noting that fluctuating payments are not appealing for people under the circumstances. “It’s not something that’s consistent that you can rely on, especially right now with everybody’s budgets getting squeezed with gas prices and inflation and food prices. Everything’s going up.”
And while she acknowledges that buydowns are more common with increased borrowing costs, the high demand for housing in Escambia and Santa Rosa County still means that sellers get the final say in whether to agree to them or not.
Clients who are trying to buy a home and keep putting in for the buydown, but for right now sellers just don’t want to bite at that,”. “That money has to come from the seller, so most sellers might go ‘I don’t want to do that. I’ll take this other guy over here who didn’t ask for a buydown seller credit.’”
The incentive to sell right now is also not very high, especially if that means you’ll have to swap out a low interest rate for a high one.
But even with a lower supply, which often hikes up housing prices, expensive borrowing costs have some silver lining for buyers. Both with an increase in interest rates, there are fewer instances of houses being sold significantly over the asking price.
“What people quickly forget is when interest rates come down, the demand goes up, and that drives prices up. In addition to more realistic home values, buyers can also benefit from other underwriting and financing approaches, apart from buydowns. Interest-only products are more readily available, and many wholesale mortgage lenders have updated their guidelines to allow for higher debt-to-income ratios for jumbo loans or loans that are used to finance high-value properties.
Both buyers and sellers are also coming to terms with the fact that pandemic-era interest rates are not the norm, and a wait-and-see approach has backfired for many.
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