Mortgage rates have surged to 20-year highs of more than 7%, and are poised to rise even further. But buyers of new homes aren’t necessarily feeling the pinch. Higher mortgage rates add hundreds of dollars in extra borrowing costs for an aspiring homeowner looking to purchase a home. But buyers of newly built homes are enjoying lower mortgage rates, as home builders offer lower rates.
In fact, some buyers of newly built homes are getting mortgages that have a rate of less than 6%, John Burns, CEO of John Burns Real Estate Consulting, wrote on LinkedIn this week. That’s because “most large home builders are allocating 4%-6% of the home-sale proceeds toward buying down the mortgage rate, permanently, for their buyers,” Burns said.
“‘Most large home builders are allocating 4%-6% of the home-sale proceeds toward buying down the mortgage rate, permanently, for their buyers.’”
— John Burns
They can afford to do so because they have seen their profit margins rise in the last few years, Burns explained, as well as due to a drop in lumber prices, which helps lower the cost of construction. “Giving back 4%-6% of the price to keep sales strong is the smart thing for them to do,” Burns added. That’s one of the key reasons why new home sales are higher than existing-home sales. Existing-home sales are at a six-month low, as few homeowners are listing their homes. The number of single-family homes listed on the market in the month of July, as compared to same time during prior years, was at the lowest since the 1980s. New home sales have only slowed down in 12% of the largest markets in the U.S., according to Burns’ research.How the mortgage-rate buydown works Many aspiring homeowners rely on mortgages to finance their purchase of a home, and every rise and fall can add or subtract hundreds of dollars in borrowing costs. Rates also have an impact on a buyer’s buying power. Buydowns can be permanent or temporary. Mortgage products like the 3-2-1 temporary rate buydown, for example, offer lower rates in the first few years of repayment, after which they permanently reset to the higher market rate. The 3-2-1 temporary rate buydown works like this: When a seller or builder pays some amount of money upfront to buy the rate down, that rate goes from approximat …