I often get questions about how new home builders advertise low interest rates like 4.99%, 4.5%, or even 4%.

So, how are they offering these low rates, and what’s really going on?

Understanding Interest Rates and Their Impact on Purchasing Power

When mortgage interest rates dropped to 2.5%, it significantly increased purchasing power and reduced monthly mortgage costs. Here's an example:

• At a 2.5% interest rate, a $800,000 home with 20% down would cost about $3,100 per month (including taxes and insurance).
• At a 6.5% interest rate, the same $800,000 home would cost about $4,600 per month, an increase of $1,500.

Higher interest rates also reduce how much home you can afford:

• At a 2.5% interest rate, an income of $150,000/year could qualify you for nearly a $1,200,000 home.
• At a 6.5% interest rate, that same income only qualifies you for an $850,000 home—a $350,000 reduction.

Why Builders Advertise Low Rates

Home builders offering low rates typically use a tactic called "buying points" on a mortgage.

• Buying points means paying money upfront to lower the mortgage interest rate over the loan's life.
• Lowering the interest rate can significantly reduce monthly payments and make homes more affordable.

Builders prefer this strategy over reducing home prices. Lowering prices can signal market depreciation, which could hurt future sales and property values in the community. By keeping prices high and reducing rates, they maintain property values while boosting buyer affordability.

Comparing Lower Prices vs. Lower Interest Rates

Here’s an example to illustrate how these strategies differ:

• A $850,000 home at a 6.5% interest rate costs about $4,700 per month.
• Dropping the price to $800,000 lowers the monthly payment to $4,500—a $200 reduction.
• Reducing the interest rate from 6.5% to 4.5% lowers the monthly payment to $3,900—a $800 reduction.

For builders, buying down the interest rate costs less than reducing the home price by $50,000 while delivering greater monthly savings to the buyer.

What Does This Mean for You?

When considering homes advertised with low-interest rates, weigh the following factors:

• Short-Term Ownership (Under 5 Years):
  If you sell within a few years, you may owe more than the home’s market value. Appreciation may take longer to offset the higher purchase price.
• Long-Term Ownership (Over 5 Years):
  Lower monthly payments and long-term appreciation can make this a smart financial move if you plan to stay in the home.
• Investment Potential:
  Lower interest rates can improve cash flow, making the property a good rental investment if the numbers work in your market.

Alternatives to Builder Offers

If advertised rates don’t align with your financial goals, consider these options:

• Negotiate a lower purchase price to minimize the principal balance.
• Accept current market rates and refinance later when rates drop.

Got Questions? Let’s Talk.

If you’re exploring new construction homes, don’t let advertisements sway you without fully understanding the numbers. Contact me to review your options and find the best solution for your needs.

Disclaimer: Numbers in this article are simple estimates based on a conventional loan, 20% down, good credit, and average taxes and insurance rates. Individual situations vary, so consult with a mortgage professional for personalized advice.