Selling a home in the US has become more difficult as fewer buyers are looking to purchase homes and mortgage rates remain high. Sellers are now cutting home prices and offering financial benefits to attract buyers. These benefits include paying some of the buyers’ closing costs or giving them money to lower their mortgage rates.
Rising mortgage rates and falling home sales have given buyers more power to negotiate with sellers. Mortgage applications have dropped sharply since late August, while homes are taking longer to sell. This has also led to an increase in the number of homes available for sale, according to Yahoo Finance.
US home sellers offer more concessions
More sellers are now offering financial benefits to buyers to complete home sales. In September, sellers offered concessions in more than 45% of all home sales, according to Redfin data. This was the highest share for September since at least 2020. Sellers are also cutting their asking prices to attract buyers. About 22% of sellers reduced their home prices during the four weeks ending October 11.
Real estate agents say sellers are having to try different ways to make their properties more attractive to buyers. Jessica Smith, a real estate agent and founder of the Key Group in Austin, Texas, said sellers are becoming more creative with their listings and offers to help buyers and sellers complete deals, according to Yahoo Finance.
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Buyers in Austin have had the upper hand in the housing market for several years. Nearly two-thirds of homes sold in the area in recent months included some form of buyer concession, according to Redfin data.
Seller concessions are financial benefits or other offers that help buyers reduce the cost of purchasing a home. These can include paying homeowners’ association dues in advance, providing cash to cover repair costs, helping with closing costs or offering money to reduce mortgage rates.
Mortgage rate buydowns help buyers save money
Mortgage rate buydowns have become one of the most popular concessions. With mortgage rates hovering around a three-year high of 7.4%, sellers are increasingly offering buyers money to lower their mortgage rates. Real estate agents and lenders told Yahoo Finance that these offers are becoming more common as sellers try to close deals.
In a mortgage rate buydown, the seller gives the buyer a credit that can be used to purchase discount points. Discount points are upfront fees paid to a lender to reduce the interest rate on a mortgage. A lower rate can help buyers reduce their monthly mortgage payments.
Mortgage rate buydowns can be structured in different ways. In one option, the buyer pays to lower the interest rate for the entire loan period. In another option, known as a 2/1 buydown, the interest rate is reduced by two percentage points in the first year and one percentage point in the second year. From the third year, the rate returns to the original agreed-upon level, according to Yahoo Finance.
These arrangements can help buyers save more money each month than an equivalent reduction in the home’s purchase price. This is especially important when mortgage rates are high because even a small reduction in the interest rate can lower monthly payments.
For example, a buyer purchasing a $400,000 home with a 20% down payment could receive $10,000 from the seller to lower the mortgage rate. If the buyer used the money for a permanent rate buydown, the interest rate could fall to 6.75%. This would save the buyer about $135 per month for the life of the mortgage, according to Yahoo Finance.
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The same $10,000 could provide even greater short-term savings through a 2/1 buydown. Under this arrangement, the buyer could save about $418 per month during the first year before the temporary rate reductions change.
In comparison, a seller cutting the same home’s purchase price by $10,000 would save the buyer only about $70 per month on their mortgage payments. This example shows why some buyers may prefer a mortgage rate buydown over a price reduction.
Home sellers combine rate cuts and price cuts
Sellers may not see a major difference between cutting the price of a home and offering a credit to reduce the buyer’s costs because both options can have a similar effect on the money they receive from the sale. Some sellers are using both methods together. Nearly one in five sellers combined price cuts with concessions in September.
Homebuilders have used mortgage rate buydowns for years to attract buyers, particularly when housing demand slows. Individual homeowners who want to sell their properties are now increasingly using the same strategy, said Jason Russell, division president of NEO Home Loans in Dixon, California, according to Yahoo Finance.
The housing market in Dixon has also slowed as buyers struggle to afford homes. The typical home in the area costs around $600,000. Russell said individual sellers can make their homes more attractive by offering similar incentives to those used by homebuilders. He added that buyers often focus more on their monthly mortgage payments than on the home’s purchase price.
Seller concessions have limits
However, sellers cannot offer unlimited financial assistance to buyers. Conventional mortgage rules generally limit seller concessions to between 3% and 6% of the home’s sale price. The exact limit depends on factors such as the loan and the buyer’s down payment.
Offers in which sellers provide $10,000 or $15,000 to help buyers lower their mortgage rates, cover closing costs or pay for a combination of both have become common, market watchers told Yahoo Finance.
Denver is another housing market where sellers are offering large concessions. With more homes available than there are buyers, many buyers in the area are seeking incentives that could bring their mortgage rates down to the low 6% range, said Marcy Eastman, a real estate agent with Compass.
Eastman recently worked with sellers who agreed to provide $25,000 to buyers purchasing their $1.15 million home. The buyers used the money to lower their mortgage rate to 5.99%, according to Yahoo Finance.
Eastman said sellers in the area are offering increasingly large concessions while also adjusting their asking prices to attract buyers. The trend reflects how sellers across slower US housing markets are using a combination of price cuts and mortgage rate buydowns to make homes more affordable and complete sales.