How Will Our Kids Ever Afford to Buy a Home? Creative Ways Utah Buyers Are Lowering Their Mortgage Rates

One of the questions parents ask me all the time right now is:

“How will our kids ever be able to afford to buy a home?”

I understand why they’re asking, it’s on my mind as a parent as well.

Home prices are significantly higher than they were a decade ago, mortgage rates are higher than what we got used to seeing a few years ago, and the monthly payment on a first home can look pretty intimidating.

But here's something I think a lot of buyers, and their parents, are missing:

The interest rate you see advertised isn't necessarily the interest rate you have to pay. There are some other programs.

Recently, we've helped several young Utah buyers purchase homes using completely different strategies to make their monthly payments much more affordable. Here are three real examples.

How did one of our buyers get a 3.99% mortgage rate?

We recently helped a young family purchase a brand-new construction home.

Instead of simply negotiating the price of the house, we looked at the entire transaction and what would make the biggest difference to this family's monthly payment.

We were able to negotiate a 5-year adjustable-rate mortgage (ARM) at 3.99%.

That gave them a much lower interest rate and a significantly more affordable payment today, with the opportunity to refinance sometime during the next five years if rates come down enough to make that worthwhile.

An ARM isn't right for everybody. You need to understand when and how the rate can adjust, what the maximum adjustments can be, and what happens if rates don't fall.

But for the right buyer, it can be another tool to consider rather than automatically assuming today's standard 30-year fixed rate is the only option.

Can a seller help permanently lower your mortgage rate?

Yes, and this is probably one of the most overlooked opportunities in today's market.

Another client of ours recently purchased an existing home. During the negotiations, we were able to get the seller to contribute enough toward the buyer's closing costs to help permanently buy down their mortgage interest rate by about two percentage points.

That's very different from a temporary buydown.

Their lower rate doesn't disappear after the first year or two. It's built into their loan for as long as they keep that mortgage.

That means they don't have to sit around hoping mortgage rates drop so they can refinance.

If rates eventually fall significantly below what they have, great. They can look at refinancing then.

But they aren't depending on that happening in order for their home to be affordable.

That's why, in some situations, negotiating seller concessions toward financing can be more valuable to a buyer than simply negotiating the same amount off the purchase price.

What is a 3-2-1 mortgage buydown?

Here's another strategy we've recently used.

We helped a buyer negotiate the price of the home down and negotiated enough seller-paid closing costs to help fund a 3-2-1 temporary buydown through the lender.

A 3-2-1 buydown works like this:

Year 1: The effective interest rate used to calculate the buyer's payment is 3 percentage points below the note rate.

Year 2: It's 2 percentage points below the note rate.

Year 3: It's 1 percentage point below the note rate.

Year 4 and beyond: The payment is based on the full fixed interest rate on the mortgage.

So, as a simplified example, if the note rate were 6.5%, the payments could effectively be calculated using:

• Year 1: 3.5%
• Year 2: 4.5%
• Year 3: 5.5%
• Year 4+: 6.5%

The exact payment and buydown structure depend on the loan program and lender.

The big advantage is that it can give a buyer several years of lower payments at the beginning of homeownership.

What happens if interest rates don't come down?

This is an important question.

A buyer shouldn't purchase a home based solely on the hope that they'll be able to refinance later.

With a temporary 3-2-1 buydown, the borrower generally has to qualify based on the terms required by the lender and loan program, which commonly means qualifying based on the full note-rate payment rather than just the temporarily reduced first-year payment.

That's an important safeguard.

The lower initial payments can provide some breathing room, but buyers should understand and be comfortable with what their payment will become after the temporary buydown ends.

Why not just negotiate a lower purchase price?

We absolutely try to negotiate the best price we can.

But here's where having a strategy becomes important.

For some buyers, getting another $10,000 or $15,000 off the purchase price may not change their monthly payment nearly as much as using seller concessions strategically toward financing.

Depending on the loan, the buyer and the seller's situation, we may be able to negotiate:

• A lower purchase price
• Seller-paid closing costs
• A permanent interest-rate buydown
• A temporary 3-2-1 or 2-1 buydown
• Builder financing incentives
• Or a combination of several of these

The question isn't simply, “How much can we get off the price?”

The better question is, “How can we structure this purchase to give this buyer the best overall financial outcome?”

Is buying a home still possible for young Utah families?

For many buyers, yes.

I'm not going to pretend affordability isn't challenging. It is.

But I also don't want young buyers looking at home prices and today's advertised mortgage rates and immediately assuming homeownership is impossible.

I've been selling Utah real estate for more than 20 years, and today's market requires us to think differently.

In a market where some sellers and builders are willing to negotiate, there can be opportunities that aren't obvious when you're scrolling through homes online.

Sometimes the opportunity isn't the house with the lowest asking price.

It may be the house where the seller is willing to help you create a substantially better financing package.

Should parents help their kids buy a home?

That's a personal financial decision for every family, but before assuming that helping your kids requires giving them a huge down payment, find out what the numbers actually look like.

There may be loan programs, seller concessions, builder incentives, down-payment options or interest-rate strategies that change the equation.

Start by finding out what they can qualify for and then work backward from a monthly payment they're comfortable with.

You might be surprised by what's possible.

What should a first-time buyer do before giving up on buying?

Don't start with Zillow and don't start by assuming the advertised mortgage rate tells the whole story.

Start with a good lender and an experienced real estate agent who understand how to structure these deals.

Have them look at:

1. What you can comfortably afford each month.
2. What financing programs you qualify for.
3. How much cash you actually need.
4. Where sellers or builders are offering incentives.
5. Whether a permanent or temporary rate buydown makes sense.
6. What can be negotiated to improve the entire deal.

Then start looking at homes.

The Bottom Line

When parents ask me, “How are our kids ever going to buy a house?” my answer is that it's definitely harder than it used to be—but don't assume it's impossible.

We've recently helped one family get into a new construction home with a 3.99% 5-year ARM.

We helped another buyer negotiate enough seller concessions to permanently reduce their interest rate by approximately two percentage points.

And we helped another buyer negotiate both a lower purchase price and a 3-2-1 temporary rate buydown.

Three buyers. Three completely different strategies.

That's what today's market requires.

If you—or one of your kids—would like to buy a home in Utah but aren't sure how the numbers could possibly work, give me a call.

Before you decide you can't afford to buy, let's look at the numbers and see what options are actually available.

Doug Cary, Realtor
The Cary Group at Century 21 Everest
Serving buyers and sellers throughout Davis County, Salt Lake County, Weber County and the Wasatch Front.