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I get a lot of questions about new home builders and how they offer these low interest rates like 4.99%, 4.5%, or even 4% on VA or FHA loans.

Here’s some clarity on what’s going on.

When mortgage interest rates dropped to 2.5% it skyrocketed people’s purchasing power and significantly cut the monthly cost of a mortgage.

For example: a $400,000 home at a 2.5% rate, VA Loan, with no money down, would be about $2,000 per month with taxes and insurance.

That same $400,000 home at a 6% rate, VA, no money down would be about $2,800 per month. $800 difference just in mortgage interest.

In terms of purchasing power: when rates were at 2.5% an income of $100,000 per year would approve you for nearly a $680,000 home.

At a 6% interest rate and a $100,000 per year income your purchasing power drops to a max of $450,000. $230,000 difference, just because of the interest.

With the influx of buyers and competition, prices soared. Now that rates have shot up to over 6%, buying activity significantly slowed, and home prices have stagnated or started to come down to meet the affordability of buyers with these current rates.

So – when builders advertise these low rates, what are they doing?

Buying “points” on a mortgage means you’re paying money upfront to lower the interest rate (i.e. lower the monthly payment) over the life of that loan.

By nature, home builders have significant equity in each home they build due to their margins and have financial “wiggle room” to do this. Simply lowering the purchase price doesn’t have the same effect as lowering the interest rate.

If a home builder has homes at $550,000, and previous buyers purchased homes at that amount in the same neighborhood, they don’t want to lower the price of newer homes as that would reveal the actual depreciation that’s happening in the market. Instead, they can keep the purchase price high and pay significant money to lower the interest rate to boost buyer’s ability to afford that home.

VeteranPCS | New home builders offering 4.99%, 4.5%, or even 4% rates? Here's the clarity you need to know

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For example: a $550,000 home at a 6% interest rate would be about $3,800 per month. And you would need an income of at least $120,000 per year to qualify for that amount of home.

Dropping the price $50,000 to $500,000 would decrease the monthly payment from $3,800 to about $3,500 per month.

However, dropping the interest rate from 6% to 4.5% decreases that monthly payment to $3,300. And it doesn’t cost the builder $50,000 to buy the rate down 1.5 points (or 1.5%).

Bigger lift, lower cost. 

So, who cares? What does this mean for you?

If you’re buying a home in this market and see advertisements for low interest rates, you may have found a good deal, but proceed with caution.

Keeping the home price higher than it should be and compensating that with a lower interest rate could mean you could get the home you want at your ideal budget. However, if you may need to sell that home in a couple years, you’ll likely be underwater as the appreciation will take longer to overtake the higher purchase price you paid. 

If you plan to hold that house for over 5 years, it could be a great deal as it meets your monthly budget now and allows appreciation to work in your favor. 

If you plan to rent the home out after a few years and the numbers work in your market, it could be a great investment. 

Other options to consider would be negotiating the price down and taking the lowest principal balance you can get with the current market rate. You can never re-negotiate the purchase price of the home, but you can re-negotiate you mortgage through a refinance. 

Got questions on all of this? Contact me and let’s talk through the numbers, rather than getting “sold” by a real estate salesperson just trying to make a sale. 

Jason Anderson military friendly real estate agent for veteranpcs

Written By: Jason Anderson

Castle Rock, CO
Army Veteran
Solid Oak Realty

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Disclaimer: Numbers in this article are simple estimates used with a mortgage calculator based on a VA Loan, no money down, good credit, average taxes and insurance rates. Taxes, insurance, credit, and debt in your personal situation will skew these estimates.