Well, it has arrived. The mortgage rate of less than 1% is here.
It’s part of a new promotion from the country’s best homebuilder, DR Horton.
The company’s financing arm, DHI Realkredit, currently offers a 0.99% mortgage rate if you buy a home in select Texas communities.
But the loan must close on or before December 31, so you need to act fast.
There are also some threads attached that I will explain.
Will 0.99% mortgage rates sell more homes?
There was an article in Bloomberg about home builders betting on 1% mortgage rates to “wake up” home buyers.
Between high home prices and mortgage rates that feel really high (their historical average is actually 7.75%), housing affordability has rarely been worse.
Much of that can be blamed on the lack of available for-sale inventory, and the fact that potential sellers often have very low fixed-rate mortgages.
This has created mortgage rate locking, where potential sellers are reluctant to sell and abandon their course.
In the process, it exacerbates the inventory problem, preventing prices from falling as they otherwise would if affordability is too low.
Although high prices are starting to take their toll, leading to price cuts and some more wiggle room from sellers, it’s still a very unaffordable housing market.
But that one home builders are not potential sellers. They are must-sellers because they can’t afford to wait. They also cannot sit on their unsold inventory.
One strategy they’ve used since 2022, when mortgage rates more than doubled (and eventually nearly tripled), has been buying down mortgages.
In short, the developer offers a below-market mortgage rate to get a buyer in without having to lower the sale price of the property.
Because it generally takes an 11% drop in home prices to match a 1% drop in mortgage rates, builders can lean on these buydowns to greatly improve affordability.
They also don’t want to lower prices, as that can have a cascading effect on a development and hurt ratings and recent buyers.
The lowest mortgage buydown I’ve ever seen
That brings us to the new mortgage purchase from DHI Realkredit, which is DR Horton’s financing department.
The company is offering an unheard of mortgage rate of 0.99% to home buyers for a limited time in select communities.
The ad I came across was for some properties in Texas, but it may also extend to properties in other states, such as Florida.
Basically the areas where inventory is piling up and needs to be moved quickly, you are most likely to see these unprecedented mortgage deals.
However, it should be noted that the mortgage interest rate of 0.99% is not fixed. You will not get such a low interest rate for the entire loan period.
It would be great if that were the case, but it isn’t.
Instead, it’s a temporary buydown, meaning it only lasts the first year of the loan.
In year two the rate increases to 1.99% and in year three it is 2.99%. Still very low, but not quite the 0.99% that got your attention.
Finally, the interest rate rises to 3.99% in year four and remains there for the remainder of the loan term.
This is known as a 3-2-1 buydown because you get a reduced rate for the first three years, which is 3% lower in year one, 2% lower in year two and 1% lower in year three.
So for 27 out of the 30 years the rate is a much higher 3.99%. And that, in the end, is what matters most.
But the 3.99% is still well below the market rate because the average 30-year fixed rate is priced at around 6.25% right now.
Temporary and permanent rate buydown solves two problems
When it all comes together, this is a temporary downgrade combined with a permanent downgrade, a tactic homebuilders have been implementing lately to really juice home sales.
It is not enough to simply give an interest reduction in the first few years of the loan. Housing affordability is just so bad.
In addition, complementing the temporary buydown with a permanent buydown allows borrowers to qualify for the lower rate.
For example, the 3.99% interest rate is used to calculate the borrower’s debt-to-income (DTI) ratio, making it much easier to get a mortgage.
If they were to qualify at say 6.25%, their DTI might be too high and DR Horton would lose a sale.
So the strategy is twofold; attract buyers with low prices and also increase approval odds.
The only problem is at 0.99%, you can’t go lower on the mortgage front.