Buying a new home is an exciting endeavor, and one of the decisions you’ll need to make is choosing the right mortgage lender. While banks and mortgage brokers are often the first options that come to mind, you may be surprised to learn that some new home builders can sometimes offer interest rates lower than those of traditional lenders. In this blog, we’ll explore the two primary reasons behind this phenomenon, and we’ll also provide guidance on how to make the best choice for your home financing.
One reason why new home builders can offer lower interest rates is by temporarily buying down the interest rate on a fixed mortgage. This practice involves the builder subsidizing a portion of the interest rate for a specified period, usually one or two years. The catch here is that builders sometimes advertise this rate as if it’s a permanent rate for the life of the loan when, in reality, it’s only a short-term incentive.
The key takeaway is to be vigilant when considering such offers. Ensure that you understand the terms and conditions associated with the temporary buy-down. Know when the promotional period ends and what the interest rate will reset to once that period is over. By doing so, you can make an informed decision about whether this option aligns with your long-term financial goals.
Forward Lock Coupons:
Another factor that enables builders to offer competitive interest rates is their ability to secure forward lock coupons. About a year ago, many builders invested in these coupons, which essentially gave them the right to fund loans based on interest rates prevalent at the time of purchase. Now that interest rates have risen significantly, these forward lock coupons have become much cheaper for builders to use.
However, like all coupons, they have an expiration date. Once these forward locks run out, builders may not be able to offer the same low interest rates. Therefore, if a builder is willing to use a forward lock coupon to secure a permanent rate buy-down that is significantly lower than current market rates, it can be a golden opportunity for homebuyers.
What Should You Do?
Now that you understand the reasons behind new home builders offering lower interest rates, you may be wondering what your best course of action should be. Here are some steps to consider:
Evaluate the Offer: Carefully review any offers from the builder’s lender. If it includes a temporary buy-down, ensure you fully comprehend the terms and are comfortable with the rate adjustment that will occur when the promotional period ends. In most cases, the rate that becomes permanent is much higher than the current 30-year fixed rate you can get from a Mortgage Broker.
Explore Forward Lock Coupons: If the builder offers a permanent rate buy-down using a forward lock coupon, seriously consider taking advantage of this opportunity. It can lead to significant long-term savings on your mortgage.
Seek Professional Advice: Don’t hesitate to reach out! We would be honored to take a look at what the builder is offering and make sure it is competitive and arm you with the information you need to make a wise decision.
In the world of home financing, new home builders have found innovative ways to temporarily provide competitive interest rates to prospective buyers. However, it’s essential to be aware of the nuances associated with temporary buy-downs and forward lock coupons. By carefully reviewing and understanding the terms of any offer and seeking advice when needed, you can make a well-informed decision that aligns with your financial goals and secures the best possible mortgage for your new home.
If you would like us to take a look at what a builder is offering you, schedule an appointment below!