Are you a real estate agent who is losing buyers because of high interest rates? If so, you’re not alone. In today’s market, many buyers are hesitant to purchase a home because they’re worried about the high cost of borrowing money.
But there are some things you can do to help your buyers overcome their objections to high interest rates. Here are three options you can discuss with them:
1. Buydowns
A buydown is a mortgage where the buyer obtains a lower interest rate for at least the first few years of their loan. There are different types of buydowns, but the most common are 3-2-1 buydowns and 2-1 buydowns.
- 3-2-1 Buydown: In a 3-2-1 buydown, the buyer has lower payments for the first three years. For each of those first three years, their interest rate goes up by 1% annually. The full interest rate then applies beginning on the fourth year of the loan. They may refinance or sell the home at any time.
- 2-1 Buydown: In the 2-1 buydown, the discount is applied for the first two years, providing a 2% lower interest rate for the first year, and then a 1% rate discount for the second year. For the third year, the rate adjusts to the full interest rate.
The buyer, seller, or builder pays the lender for the subsidy. This is paid at closing.
Buyers can qualify more easily with lower rates and enjoy lower payments for the first few years of the loan. This makes sense, especially for buyers who expect their incomes to rise or add a spouse’s income in the next few years.
2. Paying Discount Points Upfront
What if a buyer wants to lock in a lower rate for a longer period or for the life of the loan?
A buyer may choose to pay the lender upfront (at closing) for discount points. Discount points are prepaid interest that the borrower can purchase to lower their rate on subsequent monthly payments.
There is usually a one-time fee, paid upfront during either a normal purchase or later if the borrower refinances.
Each discount point costs 1% of the total loan amount (not the purchase price) and lowers the loan’s interest rate by one-eighth to one-quarter of a percent. Check with individual lenders about their rules and requirements.
Discount points do not have to be paid out of the buyer’s pocket, though they can be. The buyer may ask the seller to pay for the discount points or ask the builder for new-construction purchases.
Discount points make sense if a buyer is going to keep the house for a long time, as buying discount points can lock in a low rate for the life of the loan.
3. Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage (ARM) has features of both fixed and adjustable mortgages. Using an ARM, the rate is fixed for the first five, seven, or 10 years, and then the rest of the loan becomes adjustable, meaning it fluctuates depending on current interest rates. There are usually caps as to how much it can adjust during any period.
ARMs can be a good option for buyers who are planning to move within a few years or who are comfortable with the risk of their interest rate increasing.
Conclusion
If you’re a real estate agent who is losing buyers because of high interest rates, don’t give up! There are still things you can do to help them overcome their objections. By discussing these three options with your buyers, you may be able to help them find the right mortgage for their needs and get them back on track to purchasing a home.
I would also like to add that it is important to talk to a qualified mortgage lender to discuss all of your options and find the best loan for your individual situation.
I hope this blog post has been helpful. If you have any questions, please feel free to leave a comment below.
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