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.
