Is it possible to get a 5% mortgage rate? Yes, but here’s the catch.

Is it possible to get a 5% mortgage rate? Yes, but here’s the catch.

It’s a tough time for home buyers, with home prices at an all-time high and mortgage rates hovering close to 7%.

But there’s one place where would-be buyers can still find 30-year mortgage rates below 6%, and even under 5%.

Home builders in certain markets are offering 30-year mortgage rates as low as 4.99% to entice buyers who’ve been spooked by high housing costs. The relatively low rates come with some caveats, however.

Builders give buyers these lower rates by offering them a mortgage-rate buydown: The builder offers a discount on the mortgage rate, which lowers the buyer’s monthly payments.

Home sellers also sometimes offer buydowns, which can be either temporary or permanent. Builders are offering the discounts to offset “affordability headwinds,” analysts at Bank of America wrote in a recent note.

The practice costs builders money, which is why the strategy is being offered mainly by larger builders. Smaller builders can’t afford to do it at the same scale, Rick Palacios Jr., director of research and managing principal at John Burns Research and Consulting, told MarketWatch in an interview.

How mortgage buydowns work

In general, with a buydown, “the buyer, seller or builder will pay the lender the difference between the standard interest rate and the lowered rate through points at closing,” according to Rocket Mortgage

The home buyer gets the cheaper mortgage rate until the buydown expires. That typically happens after a few years, but buydowns don’t always expire. “If one does, the buyer will have to pay the standard interest rate for the remainder of the term, which will cause their monthly mortgage payments to increase,” Rocket Mortgage noted.

The discounted rates being offered at the moment vary by home builder, as well as by location. KB Home which builds houses in California, Texas, Florida and nine other states, is offering a 30-year loan rate as low as 5.99% on select homes in certain communities, according to the company’s website. The special interest rate is a permanently lower rate.

Lennar which builds houses in about 25 states, is offering a 4.25% rate on a 30-year mortgage for move-in-ready homes in the greater Houston area and in the greater San Antonio area, and for buyers who use a Federal Housing Administration loan, according to its website.

Home buyers can also pay for buydowns themselves. That’s a practice known as using “discount points,” and it’s come under scrutiny from the Consumer Financial Protection Bureau, a federal consumer watchdog.

Buydowns are becoming more common where housing supply has increased

Buydowns have been more common since the end of 2022, “steadily ratcheting up throughout 2023 and remaining the norm throughout 2024” — especially for entry-level homes, for which buyers are having the most difficult time qualifying for mortgages of around 7%, Palacios said.

Particularly in markets like Texas and Florida, where housing supply has surged recently, “builders must throw a lot of incentives at buyers,” Palacios said. Those incentives are coming in the form of mortgage-rate buydowns, rather than actual price cuts from builders, he noted.

In a post on X, Palacios noted that big homebuilders were “throwing more dollars at home buyers” in May 2024, compared with the year before.

It’s buyer beware when considering a mortgage buydown

Buyers who are considering a mortgage-buydown deal need to make sure they understand exactly when their mortgage rate will reset, which builders spell out in the deal’s fine print. Some builders are offering temporary buydowns, which means the mortgage rate will go up in a year or so, while others are giving buyers a permanently lower rate.

Buyers also need to understand the implications of a buydown on their home’s resale value. “Understand that when a homebuilder offers you a rate buydown, they are doing that instead of dropping the price,” Palacios said.

‘Understand that when a homebuilder offers you a rate buydown, they are doing that instead of dropping the price.’ — Rick Palacios Jr., John Burns Research and Consulting

If the consumer needs to later put that home on the market and mortgage rates are still high, they will likely have to cut the price, because “they won’t be able to offer the same lucrative seller-financing incentive the homebuilder offered them,” he said.

‘Unique time’ for home builders amid affordability woes 

The increase in builders offering financial incentives to make homeownership more affordable comes as they have ramped up building activity over the last few years.

A shortage of existing homes on the market has been a source of frustration for buyers. The lack of inventory has in turn been a major pain point for the real-estate industry. Real-estate agents and brokerages are facing a drop in sales activity as resale-home listings remain lower than normal.

On the other hand, builders have steadily added inventory. One-third of homes for sale in the first quarter of this year were newly built homes, according to an analysis by real-estate brokerage Redfin

That’s about the same level as the year before, but the share of housing inventory that’s brand new is “roughly double prepandemic levels,” according to Redfin.

“It’s a very unique time. In the years that I’ve been in the business, I’ve never seen this imbalance of supply and demand,” KB Home CEO Jeffrey T. Mezger told MarketWatch in an interview.

‘It’s a very unique time. In the years that I’ve been in the business, I’ve never seen this imbalance of supply and demand.’ — Jeffrey T. Mezger, CEO of KB Home, a major U.S. homebuilder

But among builders, some are feeling more pain than others. “I’d also describe the current era for homebuilders as a have vs. have-nots,” Palacios said.

While large, publicly traded builders have enough cash and the ability to offer mortgage-rate buydowns, as well as the ability to get the best prices from suppliers and construction workers, smaller private homebuilders “do not have these advantages for the most part, and are struggling to compete the longer interest rates stay elevated,” he noted.

Buyers are fed up with the expensive housing market

Most Americans view the current housing market unfavorably. In a recent poll by Gallup, 76% said they think it’s a bad time to buy a house, while only 21% said it’s a good time to buy.

That’s because housing affordability has waned in recent years. After years of ultralow mortgage rates, rates shot up after the Federal Reserve raised its benchmark rate in 2022. The 30-year mortgage rate has remained close to 7% for most of 2024 so far. Meanwhile, home prices in May climbed to an all-time high.

About 81% of middle-income Americans said that the high cost of housing is a major financial issue in the U.S., according to a recent survey by Santander.

The challenges involved in buying a home are also reshaping some people’s views of financial well-being. In the Santander survey, 51% of middle-income Americans said that homeownership is not necessarily a requirement to be financially prosperous.

While buyers may be feeling the sting of rising home prices, that doesn’t mean that they’re giving up on their goal of owning their own home, Mezger said.

“Everyone wants to be a homeowner. … It’s part of the American dream,” Mezger said. “It’s a big part of the American lifestyle.”

Right now, he added, “It’s like the golden age of home building.”

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