Buying a home right now feels a little like trying to play chess on a rollercoaster — there are a lot of moving pieces, to say the least. With fewer houses on the market and mortgage rates north of 7% pushing monthly payments through the roof, many potential homebuyers feel stuck between a rock and a hard place.

There is another option, though, that is allowing buyers to get a better mortgage rate than they otherwise would have — sometimes as low as 4%. Read on to find out how savvy buyers are getting these steep discounts on mortgage rates for brand-new homes.

The Highs and Lows of Mortgage Rates

According to Freddie Mac, the average fixed rate for a 30-year mortgage was 7.22% for the week ending Nov. 30. That's down slightly from highs above 8% earlier this year, but still nearly double the 4% rate that was typical over the past decade — and astronomical compared to the all-time low rate of 2.65% buyers were paying in 2021.

That might not sound like much — we're still talking single-digit rates — but when you look at how that rate impacts your monthly payments, it can be alarming. To put things into perspective, here's how each of those different interest rates would affect your interest payments on a $400,000 house with 20% down:

In other words, the amount you'd pay in interest alone with a 7.22% mortgage rate is almost as much as you'd pay — period — at a rate of 2.65%. In fact, you'll pay more in interest over those 30 years than you will in principle.

This increase in mortgage rates has priced a number of buyers out of the market, so much so that existing home sales have cratered. According to Redfin's October housing report, the pace of home sales in 2023 is expected to be the lowest since 2008, during the Great Recession.

But here's where it gets interesting. Despite many buyers being priced out, the demand for newly built homes is soaring, almost defying gravity. Sales of new homes in September were up a whopping 34% compared to last year. Why? It seems like homebuilders have found a “magic trick” to attract buyers — lower interest rates.

Homebuilders Are Slashing Mortgage Rates for Everyday Buyers

Certain builders are using an incentive called "mortgage rate buydowns" to attract budget-conscious buyers. Even though builders aren't lenders, they can still lower your mortgage rate by buying points from the lender. 

In simple terms, these builders are paying upfront to lower the mortgage rate you get on your loan. This decrease can be either for the entirety of the 30-year loan, or just for a few years — ideally, when rates will have fallen enough to refinance for a better deal.

Here's how it works: The builder buying points agrees to pay a fee upfront in order to lower the interest rate offered on a loan, either permanently or temporarily. 

So, say you're eyeing a $400,000 mortgage at 7% to buy a newly built property. For a fee (1% of the mortgage's total value, or $4,000 in this example), the lender drops your rate by 0.25%. Buy more points, and the rate drops further. So, for $16,000, your builder might reduce your mortgage rate to only 6%.

There are some limits to how much builders can offer in incentives. There's often a cap on how many points you can buy — so even the most generous builder can't lower your rate all the way down to 2%, and not all rate reductions are permanent. 

For example, many builders will offer buyers a 2/1 buydown, meaning your rate is reduced by 2% for the first year and 1% in the second, before reverting back to the actual, higher rate after that. That means if you take out a 30-year mortgage at a rate of 7.25% with a 2/1 buydown, your rate will be 5.25% for the first year, 6.25% for the second year, and 7.25% for the third year, where it will remain for the rest of the loan.

Which Homebuilders Are Offering Mortgage Rate Buydowns?

Now, before you get all misty-eyed at the kindness of all these homebuilders, don't forget that they wouldn't be offering these deals at all if it didn't benefit them as well. 

Builders are in the business of building and selling homes, and it's in their best interest to get people into their homes as quickly as possible so they can offload that inventory and move on to new projects and new revenue streams. And while an individual selling their home has the ability to wait out the housing market's mood swings to get the best price, homebuilders don't have that luxury. They have to keep building and selling for their business to continue operating, regardless of market conditions.

So, which homebuilders are currently offering these discounted mortgage rates?

As of November, Lennar (LEN) is offering rates as low as 4.99% in Austin and 3.99% in Orlando. Pulte Homes (PHM) is also in the game, with rates at 4.875% in some markets, and Toll Brothers (TOL) is offering 2/1 buydowns at 4.99% for the first year and 5.99% for the second year. 

You read that right; while the average mortgage rate hovers above 7%, smart shoppers are snagging deals with rates nearly half that. And that is by no means a complete list; local realtors should be able to provide you with specific information about homebuilder deals and incentives in your area.

There you have it! Yes, the housing market is a bit of a rollercoaster right now, but with the right strategy and some savvy shopping, you could find yourself holding the keys to your new home sooner than you think. Keep those eyes peeled for deals, and remember, knowledge is power when it comes to navigating these mortgage waters.