Today’s average 30-year interest rate remains over 6.8%. This is up from just under 6.7% a few weeks ago, and way up from the bottom of 6.10% we saw in September.
This is to remind readers that rates still remain high enough to make temporary rate buydowns very appealing to buyers.
I was going to remind readers here that “every 1% drop in rates brings an additional 5 million buyers back into the market” (to show why buydowns are so effective), but then I asked Grok for the source of that data. And Grok said it was me citing a “dude on Instagram.” So, maybe I won’t cite that data again, but I am certain that lower rates definitely do bring buyers back to the market! We saw that play out in spades in February when rates fell 1/2%, and our volume more than doubled over the course of a few days.
How Much Will It Cost to Get a 4.625% Rate?
I explain how buydowns work in detail in this blog: The Beauty of Buydowns, but I will provide a more succinct reminder in today’s blog.
A 2-1 Temporary Buydown offers a 2% below market rate in year 1 of the mortgage, 1% below market rate in year 2 of the mortgage, and then today’s market rate from year 3 onward.
So, if today’s rate is 6.625% (my rate quote below), the 2-1 buydown rate would be 4.625% in year 1, 5.625% in year 2, and 6.625% from year 3 onward.
Two quick reminders: (1) Buyers cannot pay for temporary buydowns (only sellers and third parties can); and (2) if buyers refinance before the buydown period ends, the unused portion of the cost of the buydown gets applied to the loan principal.
A 2-1 Buydown for a $500,000 Loan Will Cost About $11,500
The cost of a 2-1 Temporary Buydown for a $1 million loan will be about $23,000.
I can calculate these costs in an instant with JVM Lending’s Buydown Calculator (the entire purpose of this blog is to share this calculator again, as it is one of our most requested items).
The spreadsheet also indicates that it is often more cost-effective for sellers to offer buydowns than to offer price reductions.
I was asked yesterday how long I think temporary buydowns will remain a thing, and my answer was this: “They will remain more than viable as long as rates remain above 5.5% and as long as sellers are willing to pay for them.”
Rates Keep Climbing – Will They Stop?
Rates climbed a bit again today, partially because the bond market (that controls rates) thinks tariffs will be inflationary.
Tariffs will be less inflationary than most people think though, for several reasons, including:
(1) Consumers will simply shift their demand to other products.
(2) More expensive goods in one sector of the economy will just reduce demand in another, causing that sector’s prices to fall.
(3) Tariffs simply slow the economy in general, resulting in more demand destruction.
(4) The quantity of imported goods subject to tariffs represents a much smaller portion of our economy than most people realize (auto imports are only 0.9% of GDP, for example).
(5) True inflation is caused by abnormal increases in the money supply, and tariffs have nothing to do with that.
Tomorrow’s inflation report (PCE) could also significantly impact rates.
So, while rates will continue to bounce up and down, I still stand by my prediction that rates will eventually fall by at least 1% this year for reasons I explained in this recent blog: Rates Are Tumbling – Where’s The Bottom?
