Some home builders are offering mortgage rates as low as 3%.  Here’s how – and why – they do it.

Some home builders are offering mortgage rates as low as 3%. Here’s how – and why – they do it.

Builders are playing hardball by offering mortgage rates as low as 3% on new homes to fuel buyer demand. How and why are they doing this?

For starters, home builders are feeling a lot less gloomy these days as mortgage rates fall and buyer demand picks up. Mortgage demand surged on Wednesday and buyers rushed in to catch a drop in interest rates.

“There’s significant pent-up demand for people looking to buy a home,” Jason Will, senior vice president of market growth at Embrace Home Loans, told MarketWatch. The lender is based in Newport, RI, and generated over $6.5 billion in mortgages for 20,000 homeowners in 2022.

Some builders up the ante by offering very low interest rates to buyers.

In California, Pacific Point Communities is offering a 4 bedroom home at a mortgage rate “as low as 2.75%.”

In Texas, Pulte Homes offers a 30-year fixed-rate mortgage at 4.25% on three- to five-bedroom single-family homes.

And in various parts of the country, K. Hovanian offers a 4.99% fixed-rate mortgage.

Still, according to Mortgage News Daily, the 30-year fixed-rate mortgage is at 6.04%, which is still double what it was a year ago.

By offering to lower buyers’ mortgage rates, these homebuilders are throwing out concessions rather than lowering prices to lure buyers stuck on the sidelines.

How exactly can builders offer such low rates?

Home builders have built more margin into their financial model, which allows them to offer home buyers greater concessions, Embrace’s Will explained.

Margin refers to the profit homebuilders make when selling a new home after accounting for construction costs and other expenses.

“You are able to use [that] to fund both permanent and temporary buybacks that allow lenders to offer lower introductory rates,” Will continued.

In a mortgage rate buyback, a seller pays to lower the buyer’s mortgage rates by a specified number of points for a specified number of years (or permanently).

The process is complex in the backend. Embrace Home Loans works with a homebuilder months in advance to “lock in” mortgage rates with a term commitment.

Once the builder comes to the lender and says they expect a set number of buyers for their units, Embrace buys options, Will explained, and locks in interest before the homes are sold.

“Some builders are eating the difference between the prevailing mortgage rate and what consumers will accept just to get rid of inventory movements and empty homes.”

Then these “locked” fixed-rate low-rate mortgages are passed from the builder to the prospective buyer. “It gives the builder a competitive edge,” Will said.

Simply put, some homebuilders will eat up the difference between the prevailing mortgage rate and what consumers will accept just to get rid of inventory movements and empty homes.

“Buying incentives were pervasive and construction costs generally high, putting pressure on home builders’ margins,” the Dallas Fed reported in the Federal Reserve’s Beige Book survey.

Homebuilders are also lowering mortgage rates to avoid price cuts because it can affect the value of homes already sold, Will said, and also their ability to raise the prices of future homes.

Economists expect mortgage interest rates to fall further over the course of the year. This is undoubtedly good news for the many buyers who are stepping back into the property pool.

“We’ve seen a few quarters of stagnation while consumers waited” for rates to come down, Will said. “And now we’re seeing green sprouts from it — they’re starting to come back onto the market.”

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