NEARLY HALF OF RECENT HOME BUYERS HAVE A MORTGAGE RATE BELOW 5%

LIVING IN PHOENIX, ARIZONA

 

Nearly Half Of Recent Buyers Have A Mortgage Rate Below 5%

 

Almost half of recent home buyers with a mortgage secured a rate below 5%, a recent Zillow® survey shows. Current mortgage rates are hovering near 7%, yet many home buyers who purchased a home in the past year thought outside the box to unlock homeownership.

Mortgage rates surged from historic lows of 2.65% in 2021 to decade-long highs of 7.79% by the fall of 2023. This directly impacted home shoppers’ buying power. The typical mortgage payment rose 115% from pre-pandemic times to a recent peak in May 2024.

The unpredictable mortgage-rate landscape presents hurdles for home buyers, restricting their choices and, in some cases, preventing them from entering the housing market altogether. Despite these challenges, determined buyers are finding creative ways to afford their dream of homeownership.

Among recent buyers, 45% managed to secure a rate below 5%, Zillow’s survey data shows. More than one-third (35%) of these recent buyers could get a lower rate because the seller or home builder offered them special financing. About one-quarter either made their offer contingent on a rate buydown (26%), refinanced to a lower rate after buying (25%), or borrowed from a friend or family member (23%).

“This surprising finding really underscores 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 a lower mortgage rate, but sellers are also coming up with financing solutions to make their property more attractive to a potential buyer. Prospective home buyers should explore all the ways they can reduce their monthly payment to bring homeownership within reach.”

Here are a few ways to secure a lower mortgage rate:

Focus on credit score. A higher credit score often leads to a lower interest rate. Buyers should prioritize boosting their credit score and maintaining it all the way through closing by refraining from opening new lines of credit or making large purchases. One way to build credit is through Zillow’s rent reporting service. It allows renters who pay their rent on Zillow to build their credit when they make on-time rent payments.

Additionally, Zillow Home Loans’s BuyAbility^SM tool offers buyers a personalized assessment of suitable home prices and monthly payments that align with their financial capabilities. By considering factors like the buyer’s credit score, income and down payment, and by using current mortgage rates, this tool provides home shoppers with a comprehensive understanding of their purchasing potential.

Look into rate buydowns and mortgage points. Consider mortgage rate buydowns or purchasing mortgage points to lower interest costs on your loan. A rate buydown involves an initial payment for reduced rates in the early loan years, while buying points results in ongoing savings on monthly payments throughout the term of the loan. When buying a new-construction home, the builder may cover these costs as incentives. If this is not the case, negotiating with the seller or builder is always an option.

It’s crucial for home buyers to evaluate the break-even timeline — the point at which the savings from these strategies equal the associated costs. For personalized guidance, buyers should seek advice from a trusted loan officer.

Put more money down. Increasing the down payment decreases the loan size and the risk for the lender, which may mean they can offer a lower mortgage rate. However, saving for a down payment to even qualify for a loan can be a significant challenge for home buyers — 44% of first-time buyers used either a gift or loan from family or friends. But resources are available to alleviate the burden. By answering a few simple questions, buyers can see the available down payment assistance programs they may qualify for on Zillow listings. Among recent first-time buyers who used a mortgage, 60% received some sort of down payment assistance.

Consider house hacking. If it aligns with a buyer’s lifestyle, renting out rooms in their home to produce rental income can reduce their mortgage rate. Recent mortgage buyers who included projected rental income in their application were more likely to secure a mortgage rate below 5% than those who did not.

Check out nontraditional loan types. A 30-year, fixed-rate mortgage is the most common loan type, but there are others. An adjustable rate mortgage (ARM) features an initial lower interest rate that can change to the market rate after a fixed period, typically three, five, seven or 10 years. The primary risk of an ARM is that rates could be higher when the initial period ends, leading to higher payments.

Another option for home buyers to explore is a shorter loan term, such as a 15-year mortgage. These shorter loans come with much higher monthly payments, because the loan is being paid off more quickly, but markedly lower interest rates, meaning less of a homeowner’s monthly payment is going toward interest. To assess affordability and determine the best course of action, consulting a loan officer is recommended to make a well-informed decision tailored to a borrower’s personalized monthly budget.

Mortgage Rate	Share of Recent Mortgage Buyers*	Share of Recent Mortgage Buyers Who Received Down Payment Assistance*	Share of Recent Mortgage Buyers Who Financed With an ARM*	Share of Recent Mortgage Buyers With a Loan Term Shorter Than 30 Years*	Share of Recent Mortgage Buyers WithProjected Rental Income*
< 2%	2 %	4 %	4 %	2 %	3 %
2%–2.99%	4 %	6 %	4 %	7 %	6 %
3%–3.99%	16 %	24 %	21 %	23 %	22 %
4%–4.99%	22 %	29 %	28 %	33 %	28 %
5%–5.99%	20 %	19 %	22 %	21 %	20 %
6%–6.99%	24 %	12 %	16 %	10 %	14 %
7% +	12 %	6 %	6 %	5 %	7 %
NET: < 5%	45 %	63 %	57 %	65 %	59 %
NET 5% +	55 %	37 %	43 %	35 %	41 %

*Source: Zillow Consumer Housing Trends Report 2024

– more at azbigmedia.com