How Chicago homebuilders are luring buyers back

More homebuilders are offering mortgage buydowns to bring potential buyers to the closing table, Axios' James Briggs reports.

What it is: A buydown is when a seller, a homebuilder or even a lender pays cash to lower the buyer's mortgage rate, typically by 1 to 3 percentage points, Axios' Emily Peck explains.

• The cash goes directly to the mortgage lender at closing.
• If you're working with a builder, they may require you to work with their preferred lender.

Why it matters: Buyers can secure lower monthly payments.

How it works: Builders pay money up front to cut the price of a mortgage for a period of two years to 30 years.

• For example, national builder Pulte has offered 30-year fixed rates as low as 4.25% in recent weeks.

Of note: Buydowns are nothing new for homebuilders, who have had this tool in their box "forever," Peck reports. But it's a tool most builders are reaching for today.

Chicago builders are offering concessions in an amount that buys down the borrower's interest rates 2% from market rate the first year and 1% the second year, James Burke, Chicago mortgage sales manager at U.S. Bank, tells Axios.

The intrigue: "Everything in real estate is payment-driven," says Pat Cardoni, a Chicagoland broker and builder with Cardoni Custom Homes.

• "These buydowns allow people to get down to pre-COVID payment ranges and be able to get into the house."

Zoom out: About 75% of builders are dangling mortgage rates that buyers can't find on their own through lending institutions, according to surveys conducted by John Burns Real Estate Consulting.

• About one-third (32%) of builders are offering buydowns for the entire length of the mortgage.

• Another 30% offer reduced rates for the first two years of a mortgage.

What they're saying: Almost all the biggest players are offering an option, whether that be a permanent buydown or one spanning a couple of years, says Michael Freiburger, owner of Wilmette-based Newlook development.

The impact: The short-term benefit for buyers — in the form of a lower monthly payment — is greater than it would be if the sale price were simply reduced by the same amount, Peck writes.

• "That's because the benefit of cutting the sale price would be spread over the life of a 30-year loan instead of concentrated in the first couple of years," Peck explains.

The bottom line: Buydowns are a modern-day incentive package for homebuyers, Freiburger says.

• "Everybody's doing it, and it's not going away anytime soon."