Want a lower mortgage rate? Look for new construction
It's no secret that this is a difficult time to buy a home. There is a low supply of homes available for sale, and mortgage rates are also a lot higher than they were just a few years ago. These hurdles are enough to cause many potential buyers to wonder whether now is the right time to buy a home — or whether it makes more sense to stay in their current homes or continue renting instead.
There is one option, though, that may lead some buyers to get a better mortgage rate than they otherwise would have. The secret is to look for new construction and find a builder who is willing to go the extra mile to get buyers into their homes. It might take some time, but with enough patience, you may be able to get a mortgage rate that is lower than the average if you take this route.
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How new builders can help lower mortgage rates
It may seem counterintuitive that a builder can help you get a lower mortgage rate. Builders are not lenders, after all, and don't have any direct control over mortgage rates. But they do this by buying points on the mortgage that a potential buyer is offered from a lender.
If this seems confusing, don't worry – it's actually pretty simple. Essentially, a person or business that is buying points agrees to pay a fee upfront in order to lower the interest rate offered on a loan, either permanently or temporarily.
For instance, let's say you are interested in taking out a mortgage for $500,000 and are offered a mortgage rate of 8%. The lender may tell your builder that they will lower the loan rate by 0.25% in exchange for a point, the cost of which is equal to 1% of the total loan.
That means that for $5,000, the lender will knock a quarter of a percentage point off your rate. If the lender and the builder agree to buy down 0.75% off of the rate, that would mean purchasing three points. Those three points would cost about $15,000 in this case. You would then have a mortgage rate of 7.25%, which may seem high, but could be a good deal in today's rate environment.
Note that many lenders will limit the number of points you or your builder can buy down, however. And, not all rate buydowns are permanent. In many cases, the rate buydown is temporary, meaning that it reduces the mortgage rate for the first couple of years before it increases to the regular rate. It all depends on the rate incentives that the builder is offering.
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Why builders buy down mortgage rates
Builders are a business, and they want to get people into their homes as quickly as possible. They don't always have the ability to wait out the market the way those selling their homes do. Builders need to offload inventory — and the longer it takes to fill a development, the longer it may take for a builder to move on to new projects.
Builders are especially likely to use this tactic to sell homes to people looking to buy their first home, says Doug Duncan, senior chief economist and vice president at Fannie Mae. These buyers aren't coming into the sale with any equity, and are more interested in solid financing than in fancy cosmetic touches like "marble countertops and finished basements," Duncan notes.
What's more, builders will explain to these potential buyers that they will save them time and effort in the long run.
"They're going to buy it down to the level that they think it's going to be refinancable in the next couple of years," Duncan says.
By lowering the rate now to what might be available via refinancing in a few years, new homeowners can avoid the hassle and cost of the refinancing process down the line.
The bottom line
Mortgage rates are high right now, and it is understandable that some potential buyers are scared off by the prospect of paying too much in interest. Looking for new construction, though, may give you a leg up, as some builders are willing to buy down rates in order to get you into their new homes faster.
