There’s no doubt about it, interest rates are HIGH. But are you stuck with them? Not always. There are ways to lower your interest rates and reduce your monthly mortgage payments; you just need to be a creative and smart homebuyer. 

Buying New Homes with Builder Incentives

An effective strategy to secure lower interest rates is purchasing a new home from a builder. To offload inventory, many builders offer incentives that reduce the cost of buyer financing. One such incentive is the buydown option, where builders pay a portion of the buyer's mortgage interest upfront, thereby lowering the borrower's monthly payments. There are two buydown incentives that builders are using: 

Full-Term Buydowns: Some builders are willing to buy down the interest rate for the entire 30-year mortgage term. While this strategy is advantageous for buyers, it can be expensive for builders, often costing them around 5% to 6% of the sales price upfront. However, the difference between a 6.5% and 5.5% mortgage could save a borrower thousands of dollars a year for the life of the loan. 
Partial Buydowns: Other builders may offer variations of buydowns, such as reducing the rate for the first two years (a 2-1 buydown) or providing a one-year buydown. These options can make homeownership more affordable in the initial years. The downside is that the borrower still needs to qualify for a loan at the full interest rate. 

A buydown can be a useful strategy that lowers buyer monthly payments while we wait for the interest rate environment to improve. Once interest rates drop, take advantage of lower rates by refinancing your loan. So, yes, you could entirely avoid paying today’s 7+% interest rate.

Seller Concessions: Buydowns

If you’re purchasing a home on the secondary market and want to enter negotiations with a seller, then you need to consider buydowns as opposed to reducing the purchase price. 

Perhaps a home has been sitting on the market for months at $300,000, and you see an opportunity to snag a deal. Before you dive in with a lowball offer, talk to your real estate agent and mortgage broker about interest-rate buydown options. 

Buyers can request a buydown for two or three years. Similar to a builder buydown, when a seller pays for a buydown, they are essentially paying the interest upfront. In a 3-2-1 buydown, the interest rate is discounted by 3% for the first year, 2% for the second year, and 1% for the third year before it returns to the original interest rate amount. In a 2-1 buydown, the interest rate is 2% lower the first year, 1% lower the second year, and returns to the locked-in rate in year 3. 

Buydowns lower monthly payments for the buyer, giving them the financial flexibility to make repairs or increase savings. However, they aren’t best for every buyer, so it’s best to consult with your real estate agent and mortgage broker.

How to Negotiate a Lower Interest Rate

Securing lower interest rates is a top priority for most homebuyers. Your agent will play a critical role in the negotiation process and help you secure incentives like interest rate buydowns from new home builders and traditional sellers. If you have questions about how to buy at a lower rate, I invite you to get in touch with me, and I’d be happy to discuss the advantages and disadvantages.