Everyone knows that high mortgage rates have been a big drag lately, especially for potential homebuyers facing sky-high asking prices.
But what if I told you that nearly half of those who recently bought a home are still getting an interest rate of less than 5%?
It seems highly unlikely, given the fact that the 30-year fixed rate has returned to over 7%, and has never fallen below 6% throughout 2024.
However, that hasn’t stopped 45% of “prime mortgage buyers” (non-cash buyers) from getting a mortgage rate below 5%, according to a new survey by Zillow.
As for how, the most common reason is special financing offered by the seller or home builder.
Special mortgage rates from home builders
One of the most popular ways to get a below market mortgage rate was through home builders.
They often run in-house mortgage companies to ensure their clients get to the finish line.
Thanks to a financing tool called forward commitments, they are able to offer very low mortgage rates to customers who use their captive lender.
These commitments involve purchasing low interest rate mortgages in bulk, early, and then distributing the lower rates to clients purchasing properties in select communities.
While some only offer temporary interest rate reductions, many have recently offered permanent interest rate purchases for the full 30-year term of the loan.
This may sound very nice, but keep in mind that you need to buy a newly built home to get the special price.
Some have argued that the discount is built into a higher sales price, so you need to be careful.
Also read my article on using a home builder mortgage lender to learn more about that.
For registration, individual home sellers can offer sales concessions that can be used to purchase a lower mortgage rate as well.
Combined with builders’ purchases, this was the most common reason for the 35% decline in the rate.
Another 26% said their offer was conditional on a price reduction from the seller/builder. So more than half of the lower rates came from these arrangements alone.
Buy points to lower your price
The third most common reason a recent homebuyer is able to get a lower mortgage rate is because of discount points (at 23%).
If you have the funds available, it is always possible to buy at a lower rate by paying some money upfront.
This is a form of prepaid interest where you pay today for savings tomorrow. But the key is to hold on to the loan long enough to experience the savings.
The problem with this is that if mortgage rates fall before the break-even point (when points become profitable), it dampens the refinancing rate.
Or if you sell the property too early, same thing. In contrast, temporary purchases do not result in a loss of money.
If you sell/refinance shortly after a temporary purchase, the remaining funds will usually be applied to the outstanding loan balance.
In short, there is a risk when buying points that you will be leaving money on the table.
The same can be said for temporary purchases as mortgage rates may not be lower when the price reverts to the higher interest rate.
Many people have bought a home and dated the price, assuming mortgage rates would fall. So far they haven’t.
You obtained a mortgage from a friend or family member
23% of buyers said they got a lower interest rate because they borrowed from a friend or family member.
This is very surprising to me when I see that this is such a large percentage of the population. I can’t imagine many homebuyers getting private financing from mom and dad or anyone else.
But according to the Zillow study, that’s what the numbers indicate. For me, it’s very rare to use financing within a family, but it’s definitely a good thing, especially with prices being so much higher today.
For example, your parents may offer to finance your home purchase at a special low rate from Mom and Dad’s bank, perhaps a cool 3.99%!
If you’re very lucky, that’s great. But for most people this is unfortunately not a reality.
Another common reason people get less than 5% interest rates on a mortgage is to refinance after purchasing a home.
They must have stuck to the timing (and paid the points) because rates have not officially dropped below 6% this year.
Finally, mortgage rates below 5% have been associated with adjustable-rate mortgages, home buyer assistance, and shorter loan terms, such as 15-year fixed loans.
Of course, if it’s not constant for 30 years, less than 5% doesn’t have quite the same meaning or value.
However, it’s impressive to see that nearly half of homebuyers got creative and found a way around the mortgage rate hurdle.
The problem is that there is still rising home prices to contend with, and there are few ways around that at the moment.
Zillow report examines 2024 consumer housing trends included 18,500 successful homebuyers sent between March and September 2024.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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