Whether you’re a hopeful buyer who’s been tracking interest rates or a seller keeping tabs on market trends, you’ve likely noticed that today’s market is much more balanced than we’ve seen in the past few years. Without the record-low interest rates of 2020, homes in Colorado are sitting on the market longer than usual—-in most cases, a couple of months. Many sellers drop the price of their listings incrementally, and home prices are much more reasonable now than they were a few years ago. On top of that, negotiation power is much more even in today’s market.
Current interest rates can look intimidating, especially in contrast with the rates we saw in 2020 and 2021. As a result, many buyers are staying out of the game and waiting for rates to drop—-but that’s not necessarily the best strategy. Let’s explore other ways to reach your real estate goals in the context of our current market.
2-1 Buydown for Mortgage Rates, Explained
A commonly overlooked tool in a buyer’s toolbox? The 2-1 mortgage rate buydown. A 2-1 buydown is a financing method allowing buyers to pay a reduced interest rate for the first year of the loan and a slightly less reduced rate for the second year. Usually, the first year’s rate is 2% lower than the offered interest rate, and the second year’s is 1% lower.
For example, a 2-1 buydown mortgage agreement can bring the buyer’s mortgage rate from 7% to 5% for the first year, then 6% for the second year. This agreement gives buyers the chance to refinance their loan when interest rates do eventually drop.
In order to buy down a mortgage rate, buyers need to include a 2-1 buydown mortgage concession in the terms of their offer. Whether you raise the total offer price to make room for that concession or whether you use the 2-1 buydown concession as a tool for negotiating a lower overall price depends on your own strategy in the context of the home you’re offering on.
For sellers, it’s a good idea to consider the reality that many buyers will be interested in a 2-1 buydown as a result of today’s mortgage rates. You can make the most of that reality by offering a 2-1 buydown concession included in your sale price and marketing to help buyers visualize a more suitable monthly payment on your home. If you don’t offer the concession up front, calculate the possibility of paying for the buydown if an attractive offer comes in for your home.
A Better Buyer Strategy
With the option of a 2-1 buydown, mortgage rates quickly become more approachable for buyers at a range of price points. In a market like this, while many buyers are waiting on the sidelines for rates to drop, strategic buyers are instead shopping while the market is balanced. Right now, most sellers are willing to negotiate on price and concessions, and homes are priced lower than they will be when rates drop and competition increases again.
Popular home buying advice teaches us to “marry the house, date the rate.” While it can feel daunting to buy a home while interest rates are high, tools like the 2-1 buydown make mortgage rates and monthly payments much more workable for homebuyers.
When rates drop, do you want to be setting out on your home search along with a crowd of buyers and competing for desirable homes at premium prices? Or would you rather be settling into your beautiful new home and refinancing your rate, with no worries about bidding wars and soaring home prices?
Regardless of your timing and your ultimate real estate goals, we’d love to help clarify your options and guide you through the process of buying or selling a home in Colorado. Reach out anytime with questions or to get started on your home search in this balanced market!
