These days, prospective homeowners are looking for the best deal to cope with the elevated mortgage interest rates and high home prices that persist due to lack of inventory of resale homes. Today, we’ll share how to get the best mortgage rate by sharing some deals you can get from new construction builders and mortgage lenders.
Finding the Best Loan Rates
When you take out a mortgage to buy a home, you’re borrowing money from a lender who charges you interest, or an extra fee, on the amount you borrow. The interest is a percentage of the total loan amount, and it’s what you pay in addition to repaying the actual loan. The higher the interest rate, the more you pay per month.
By getting a lower interest rate, you can position yourself to get the lowest possible payments for your entire loan term. To lower a loan’s interest rate, borrowers typically follow one of two paths:
- Pay down some mortgage interest points with your lender before loan finalization.
- Look for a new construction builder that offers rate buydowns as a builder incentive.
Note: There are various types of buydowns available. Sometimes the discount will last for the entire term of the 30-year mortgage. In other instances, you may be offered a 2-1 buydown, which offers you a low rate for the first year of borrowing, then higher rates the following years.
How do I get a cheaper home loan?
You can get a cheaper home loan by paying down its mortgage points (also known as discount points). This is a strategy used to make the loan more affordable for the borrower, especially in the early years of the mortgage. Let’s compare a regular mortgage with a higher interest rate vs. a mortgage rate buydown.
- Regular Higher Rate Mortgage: Let’s say you take out a mortgage loan for $240,000 with an interest rate of 7%. That means you pay 7% interest on your loan amount. Your loan’s repayment amount, known as the principal, is added to the interest to make up a good chunk of your monthly payment (along with taxes and fees). Principal + Interest = $1,597.
- Mortgage Rate Buydown: When buying points for this same loan, down to let’s say, 5%, the principal plus interest equals only $1,288. That’s $309 in savings per month!
As you can see, a rate buydown is a great financial incentive to help borrowers afford their mortgage payments more easily by giving them the best rate possible.
Homebuyers who choose a 30-year fixed rate mortgage with a buydown that lasts throughout the life of the loan benefit greatly. However, a temporary buydown can also work for your personal finances if you just need a couple of years to get used to the higher annual percentage rate.
Can I get a good home loan with a new construction house?
Yes, you can get a good home loan with new construction. In fact, you may get even better monthly mortgage payments when compared to the value you’re getting in a brand-new home. Think about it this way. You can pay down points for a resale home and get a lower interest rate like in our previous example. And things can work out great — if your resale home is in good condition.
Or, you can work with a new construction builder that can offer lucrative rate buydowns from their preferred lenders. Often, these are among the most competitive rates you’ll see in the real estate market. When you consider cost vs. value, a brand-new home with a lower mortgage rate is a better deal.
Though the total cost of a new construction home is generally higher, the fact that you are extremely unlikely to need work on expensive things like roofing, windows, flooring, kitchen upgrades, or anything else makes new construction homeownership a financial benefit.
Are there other ways to get a better home loan?
Yes, there are a few things you can do to lower the current mortgage rate with your lender. If you can’t buy any discount points, you can earn the lowest possible interest rate through being a less risky borrower.
- Have an excellent credit score. We’re talking high 700’s and into the 800s. The higher credit score you have, the better. Check your credit report every so often to see where you stand.
- Have a low debt-to-income ratio (DTI) Experts recommend less than 28% for home loan applicants.
- Lower your credit utilization rate. Opening too many credit cards and using too much available credit makes you look riskier, which doesn’t just affect your loan preapproval chances, but downgrades your overall financial profile.
- Keep your mortgage as simple as possible. Regardless of the type of mortgage you have, you can eliminate risk variables like private mortgage insurance (PMI) or rolling closing costs into the loan. These “add ons” increase your borrowing rate.
- Pay as much of a down payment upfront as you can. Paying enough will get rid of PMI too, which adds more fees and increases your interest rate.
- Explore a shorter loan term. If you can handle higher payments in exchange for lower interest rates and interest, check out 15-year mortgages. Not sure which option to go with? Ask your lender for a loan estimate comparison of 15 years of payments vs. 30 years or check out some online mortgage calculators.
- Check out different types of loans. You may be eligible for government-backed loans like VA loans or FHA loans that usually come with lower interest rates and less stringent down payment qualifications.
As you can see, you can still get the lowest rate for standard buyers by just having a good financial profile. But you can do even more if you think outside the box and pursue new construction!
- Note: If your financial situation is modest, you may be eligible for assistance with closing costs and down payments through your state and the federal government. There are quite a few programs out there to assist first-time homebuyers with limited financial means to become homeowners. See some Federal homebuying programs here.
Getting the Lowest Interest Rates on Your Home
Whether you’re buying a resale home and working with a mortgage broker or looking for a better rate through a new construction home builder, there are plenty of ways to get mortgage interest rates that are better than the average rate.
Marketplace Homes is an expert in new construction homes. We partner with most of the nation’s top builders, offering more solutions to move than any other brokerage in the country. If you’re looking to do a rate buydown for a new build, let’s schedule an appointment to chat today!
