How to Buy a Home With a Low Interest Rate

It’s no surprise that we’ve watched interest rates on mortgages shoot up over the last couple months as the FED continues to hike rates in order to slow inflation down. However, it’s important to remember that the low interest rates we saw in 2020 - mid 2022 were held artificially low in order to stimulate the economy to continue spending during the COVID-19 pandemic. As it stands, the average interest between 1971 and March 2023 is 7.75%, which we are fortunately still below.

As I work with buyer client’s a common question they ask is “is there a way to purchase my home with a lower interest rate than what is quoted by the lender?” and the answer is YES! Below are some solutions to purchasing a home with a lower interest rate:

1. CONSIDER A 2-1 BUY DOWN
A very common method that many buyers are looking into to lower their interest rate is a 2-1 buy down. A 2-1 buy down is a mortgage loan with interest rate deductions during the first two years of the loan. To further elaborate on a 2-1 buy down, your interest rate on your mortgage will drop 2% in the first year, 1% in the second year, and will return to the full interest rate by the third year. You can always refinance your loan in the event that interest rates drop to a more favorable number at any point in time in your loan.

2. PURCHASE POINTS TO BUY DOWN THE INTEREST RATE
Many homebuyers aren’t aware that you’re actually able to buy down the interest rate of your loan using what lenders call “points”. The cost of one point is equal to about 1% of your loan amount and will buy down approximately .25% of your interest rate. For example, if you purchased a home for $500,000 and are financing $475,000 of that purchase, it would cost you ~$4,750 to buy down .25% of whatever the existing interest rate is on your mortgage.

3. CONSIDER NEW CONSTRUCTION
This is my favorite option, because most home buyers (and Realtors who aren’t a certified New Home Construction Broker) aren’t aware of it. Most large scale builders purchase a surplus of mortgages with low interest rates and when you finance through that builders preferred lender, they are able to offer you a mortgage with that pre-bought low interest rate. For example, I’m actively working with a builder that is able to offer my clients a 5.25% interest rate on an FHA loan and a 5.75% interest rate on a conventional 30-year loan, when the current raw interest rates on mortgages is ~7%. To put that in perspective, a 5.75% interest rate would save you roughly $270ish/month on a $300,000 home.

4. LOOK INTO ARM LOANS
An ARM (also known as an Adjustable Rate Mortgage), is a type of home loan with an interest rate that adjusts over time based on the market. There are 4 different types of Adjustable Rate Mortgages: 3/1, 5/1, 7/1, and 10/1. ARMs typically start with a lower interest rate than fixed-rate mortgages (I.E. FHA, VA, or Conventional loans), so they are great options if your goal is to get the lowest interest rate starting out. Keep in mind that the rate won’t last forever- in the case of a 3/1 ARM, your fixed rate is only for the first three years and will return to the full interest rate by the third year. Same case goes for a 5/1 ARM- your fixed rate is only for the first five years and will return to the full interest rate by the fifth year. As a general rule, the shorter your fixed-rate period is, the lower your interest rate will be. You can always refinance your loan in the event that interest rates drop to a more favorable number at any point in time in your loan.