After falling to close to 6% in September, the average 30-year fixed-rate mortgage is climbing toward 7% again, pricing many home seekers out of the housing market. But a new study from real estate marketplace Zillow found that remarkably, nearly half of recent buyers secured a mortgage rate below 5%.
How? According to Zillow, by employing creative strategies to achieve homeownership. Without these hacks, many of the homeowners could still be renting.
Mortgage rates have surged from historic lows of 2.65% in 2021 to decade-highs of 7.79% by the fall of 2023, significantly affecting buyers' purchasing power. The typical mortgage payment has increased by 115% from pre-pandemic levels to a peak in May 2024.
Mortgage rates have surged with inflation and reduced home sales. However, that hasn't brought down home prices, which are still near record highs.
Needless to say, high prices and the unpredictable mortgage-rate environment pose challenges for homebuyers, limiting their options and, in some cases, preventing them from entering the housing market. However, determined buyers are finding innovative ways to make homeownership a reality.
According to Zillow's survey, 45% of recent buyers secured a rate below 5%. More than one-third (35%) achieved this through special financing offered by sellers or home builders. About one-quarter made their offer contingent on a rate buydown, refinanced to a lower rate after the purchase or borrowed from friends or family.
"This surprising finding highlights the creativity of both buyers and sellers navigating today's dynamic real estate market," said Amanda Pendleton, Zillow's home trends expert. "Buyers are finding innovative ways to secure lower mortgage rates, while sellers are offering financing solutions to attract potential buyers. Prospective homebuyers should explore all avenues to reduce their monthly payments and make homeownership attainable."
Strategies to secure a lower mortgage rate
Focus on Credit Score: A higher credit score can lead to a lower interest rate. Buyers should work on improving their credit score and maintaining it through closing by avoiding new credit lines or large purchases. Zillow's rent reporting service can help renters build credit by reporting on-time rent payments.
Consider Rate Buydowns and Mortgage Points: Buyers can explore mortgage rate buydowns or purchasing points to lower interest costs. A rate buydown involves paying upfront for reduced rates initially, while buying points offers ongoing savings. Builders may cover these costs for new-construction homes, but negotiation is also an option.
Increase Down Payment: A larger down payment reduces the loan size and risk for the lender, potentially leading to a lower mortgage rate. While saving for a down payment can be challenging, especially for first-time buyers, resources are available to help. Zillow listings can show available down payment assistance programs.
Consider House Hacking: Renting out rooms to generate rental income can help reduce mortgage rates. Buyers who included projected rental income in their mortgage application were more likely to secure rates below 5%.
Explore Nontraditional Loan Types: Beyond the common 30-year fixed-rate mortgage, options like adjustable-rate mortgages (ARMs) offer initially lower rates that adjust after a set period. Shorter loan terms, like 15-year mortgages, have higher monthly payments but lower interest rates. Consulting a loan officer can help buyers assess affordability and make informed decisions based on their budget.