Ways to Combat High Mortgage Rates

The Denver Real Estate Market has been shifting for several months now. Record high inflation has led to the Fed to raise interest rates several times in 2022 to try to bring it under control. The result has been mortgage rates grew sharply from the 3% rates we saw at the beginning of 2022 to around 6.5% to close out 2022.

Mortgage Rates This sent shockwaves through the real estate market causing many Buyers to pump the brakes as they waited to see if rates would stablize. Gone was the buyer feeding frenzy that gripped the market in the first quarter of 2022. It was replaced with more homes on the market then we have seen in years. Most homes were no longer seeing bids over asking with quite a large majority having price reductions. 

While it may have felt like the sky was falling for some, the fact is the market couldn't sustain the record growth much longer. We now find ourselves in more of an even market meaning that the advantage is no longer strongly with Sellers. The change is going allow buyers to be able to purchase a home for closer to the asking price without having to overpay for the property. 

As we enter into 2023 both Buyers and Sellers are figuring out how to navigate the new reality. Inflation continues to be at the forefront and indications are the Fed will continue to raise the interest rates in 2023 at a less agreesive pace than before. 

As Buyers try to figure out ways to afford homes and Sellers are coming to the realization that they are having to offer concessions to get their home sold there is a way to bring the two together. It's time to get familiar again with the term "Rate Buydown."

Rate Buydowns

Many may be familar with a rate buy down but for those who are not familiar with it we will explain it to you. The rate buydown program can be as follows:

  • 2/1 Rate Buydown
  • 1/1 Rate Buydown
  • 1/0 Rate Buydown 

Here are how these programs work. The average conventional interest rate today is 6.5% .

The 2/1 loan program allows for your interest rate to be reduced to 4.5% (2% points lower) for the first year. 5.5% (1% point lower) for the second year and then it returns to the original interest rate of 6.5% for years 3-30. 

The 1/1 loan program allows for your interest rate to be reduced to 5.5% (1% point lower) for the first year. 5.5% (1% point lower) for the second year and then it returns to the original interest rate of 6.5% for years 3-30. 

Lastly the 1/0 loan program allows for your interest rate to be reduced to 5.5% (1% point lower) for the first year and then it returns to the original interest rate of 6.5% for years 2-30. 

Unpaid interst is collected upfront on whichever program you choose. The unpaid interest collected upfront is held in an escrow account. If the homeowner either refinances the loan or selles before the 3rd year, the unpaid interest is credited to the funds to the pay off their loan. Simply put, it's a win win as you get the benefits of the funds one way or the other. Here is an example of the costs involved with each program.

Rate Buydown ChartThese costs can be paid for by either the Buyer or the Seller. Many Sellers are  offering price reductions now. Some savy Sellers are now offering money toward rate buy downs to help their listing stand out apart from the competition. 

If you are thinking or buying a home in 2023 this can be a great strategy. It can help bridge the gap until rates come down and you can refince in the future. 

Here at Denver Realty Pro, LLC we have experience in all kinds of housing markets. Contact us today so we can learn about your needs and come up with a plan that best meets your unique situation.