Permanent Rate Buydowns Continue To Reign For Affordability-Minded Buyers

Rate buydowns continue to soar as borrowers look for ways to combat the affordability crisis, according to new data from Black Knight.

In the third week of January, 57% of buyers paid at least a half-point on a permanent buydown, while 44% paid a full point, and almost 25% bought down two or more points.

In total, borrowers paid an average of 1.25 points down, at an average of $4,300 per borrower.

Pre-pandemic buydowns from 2018 to 2020 averaged only 0.5 points, around $1,500.

This is not the high point for buydowns, which peaked in September and October 2022 with 71% of buyers buying down their rates. But it points to a continuing trend of buyers trying to decrease their monthly payments.

Purchase locks rebounded some in January, up 64% from the first to last week of January, the sharpest increase in five years. They now account for 81% of new locks and paid down an average of 1.16 points on their rates.

“What we’ve seen in response to this challenging environment is greater reliance on permanent rate buydowns by borrowers,” Black Knight Data & Analytics President Ben Graboske said.

“There have been murmurs and stories around temporary buydowns, but those remain a relatively small share of originations in general. In the third week of January, 3% of purchase loans locked on Black Knight’s Optimal Blue platform included a temporary buydown.”

The most common market offerings for temporary buydowns were 1/0s, 2/1s and 3/2/1s.

These can lead to “payment shocks” in the future if borrowers don’t adequately prepare for their payments to increase after the buydown period.

Temporary buydowns have a bad rap stretching back to the 2008 financial crisis when lenders used them to qualify borrowers for loans they couldn’t actually afford. New rules stemming from the 2010 Dodd-Frank law help to prevent future payment problems by requiring buyers to qualify for the higher future rate, not the temporary one.

But permanent buydowns may be gaining steam as a seller concession. They can be cheaper than lowering the price of the home and have additional benefits for the property value. Matt Harris, a real estate agent with EXP Realty, noted that when homebuilders offer a cloning credit at closing for a permanent rate buydown, the value of the property doesn’t decline.

“In the end, the buyer wins with a reduced interest rate and the seller wins by maintaining property values,” he said.

Buyers saw a record share of seller concessions like buydowns in Q4 2022.

“It took a while, but seller expectations are coming back down to earth. Concessions were common before the pandemic, and we may be returning to that norm,” said Van Welborn, a Redfin real estate agent in Phoenix.

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