3 Ways to Get a 5% Interest Rate on Your New Home's Mortgage
Although the Fed is expected to start a slow rate drop in September, you can get a 5% mortgage now. Read on to find out how.
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Even with the Federal Reserve Board meeting in September promising a drop in the federal funds rate, buyers still won't be able to buy a house with a 5% mortgage interest rate just yet. If you're looking for a better way to buy your next home, especially if you plan to stay there over the long term, there are a few tricks left in the sleeves of mortgage lenders and home sellers alike.
Let's walk through your options for getting a 5% interest rate this fall.
1. Buy a new-construction home
Wait, what? I can hear you asking it, so I'm going to answer it now. Yes, there are many large builders with their own lending companies that are making these mortgages and have been for some time. Although teaser rates for new-construction mortgages have been common for decades, many of these newer loans are true fixed-rate mortgages for new construction home buyers.
How does it work? Well, for many builders, instead of offering upgrades to their homes, they're giving away lower mortgage rates as incentives for certain communities. Since they're coming from in-house lenders, they have a greater amount of control over the loan and the terms they offer.
The National Association of Realtors reports that even home builders without in-house lending are paying about $20,000 to buy down rates for their clients. That isn't much more than the cost of a fancy upgraded kitchen or a couple of extra classy bathroom upgrades.
2. Choose your own home and buy down your own rate
Since rates were low for so long, mortgage lenders hardly ever tried to sell home buyers discount points, but those days are over. Although it's still not necessarily a go-to move, you can buy discount points to reduce your mortgage's interest rate permanently.
The effect of a discount point varies based on the loan and lender you're using, but each point generally costs about 1% of the loan rate. For example, if your lender offers discount points for 0.25% each, and your original mortgage offer is at the 30-year fixed rate average of 6.46% for Aug. 22, 2024, your new rate including two discount points would be 5.96% for the rest of your loan's life.
Before you buy down your mortgage rate, though, make sure that you'll be in your home long enough to make it worthwhile. For example, on a $400,000 loan, those two points would cost you $8,000 total. That takes your principal and interest payment from $2,014.21 per month to $1,910.34, a $103.87 difference.
You'll need to be in your home for just over 77 months, or six years and five months, to reach the break-even point, which is very doable.
3. Assume someone else's mortgage
Much like we rarely talk about discount points these days, we also rarely talk about assumable mortgages, even though it's entirely possible with some loan types. Government-backed loans, like FHA, VA, or USDA loans, can often be assumed, provided you qualify for them.
Generally, buyers with assumable mortgages will need to be able to qualify just like they were new loans. For instance, you can't assume a VA mortgage unless you're a veteran, and you can't assume a USDA mortgage unless you meet the income guidelines for that loan type.
However, if you were planning on getting one of these mortgages anyway, an assumable mortgage with a low interest rate can help you really get a jump on a hot mortgage rate. You'll have to bring the difference between the note you're assuming and the asking price to closing, but you can do this in cash or in the form of a second mortgage, which will result in a blended rate.
If you're buying a $300,000 home with an assumable mortgage, it works like this: Let's say that the original loan you're assuming still has $200,000 and 20 years to go on it at 3.5%, and you borrow another $100,000 at 7.5% for 20 years as a second mortgage. Your primary mortgage and your secondary mortgage will be weighted together based on balance and length of the note, and a rate will come out that's about 4.8% blended. That's your effective rate for both loans combined.
It doesn't take the Fed to lower rates for you to get a 5% mortgage
Although it's nice when all the mortgages are the same price, it doesn't really require a move by the Federal Reserve Board for you to get a sub-6% mortgage these days. You just have to think a little bit outside the box and maybe do a little bit of extra paperwork to get a mortgage rate that you can really live with for the long term.
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