Mortgage Gimmicks Explained
Mortgage rates have been rising steeply since 2021 and are now commonly found in the neighborhood of 7%. This is significant as you might remember rates in 2021 were often below 3%.1 The run-up has cooled the housing market considerably.
Now, lenders are having to get creative to drive new business. They’re offering more incentives to find new buyers and to undercut the competition. Let’s take a look at some of these strategies (gimmicks if you’re a pessimist), to help you and those you know make smart lending decisions.
Temporary Buydowns
Rocket Mortgage, the nation’s largest lender, recently introduced its Inflation Buster program, which promises to cut a borrower’s interest rate by one percentage point on a fixed-rate loan for the first year.2 This is called a temporary buydown, which provides a lower introductory rate on fixed mortgages for the first year; after that, it bounces back to the original mortgage rate.3
While this temporary buydown may seem enticing, it’s important for buyers to understand the details and qualifications involved. After the first year, the interest rate will revert to the original rate agreed upon, which could be significantly higher.
Cashback Incentives
Some lenders are offering cashback incentives to entice homebuyers. These incentives typically involve the lender providing a certain percentage of the loan amount back to the borrower at the closing of the mortgage. For example, a lender may offer a 1% cashback incentive on a $300,000 mortgage, which would amount to $3,000 returned to the borrower.
Cashback incentives can be attractive for buyers as they provide immediate funds that can be used for various purposes, such as covering moving expenses, furniture purchases, or even making home improvements. However, borrowers should carefully evaluate the terms and conditions of these incentives, as they may be subject to certain restrictions or limitations.
Flexible Loan Programs
To accommodate borrowers in a changing market environment, lenders are also introducing more flexible loan programs. These programs may include adjustable-rate mortgages (ARMs) or hybrid loans, which offer a fixed interest rate for an initial period before transitioning to an adjustable rate.3
ARMs can be advantageous for borrowers who plan to sell or refinance their home within a few years, as they typically offer lower interest rates during the initial fixed-rate period. However, it’s crucial to understand the risks associated with adjustable rates, as they can fluctuate over time and potentially lead to higher mortgage payments in the future.
Hybrid loans, on the other hand, provide borrowers with a fixed interest rate for a predetermined period, such as five or seven years, before converting to an adjustable rate.3 These loans offer a balance between the stability of a fixed-rate mortgage and the potential cost savings of an adjustable-rate mortgage.
With mortgage rates on the rise, lenders are implementing various strategies to attract new buyers and stay competitive in the market. Temporary buydowns, cashback incentives, and flexible loan programs are among the approaches used to entice borrowers.
While these strategies can provide short-term benefits, it’s crucial for buyers to thoroughly evaluate the terms and consider their long-term financial situation before making a decision. Consulting with a mortgage professional is always advisable to make informed lending decisions that align with individual circumstances and goals.
Sources
1 Mac, Freddie. (9 July 2023). 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US. Accessed 10 July 2023.
2 Rocket Companies. (2022, September 16). Rocket Mortgage’s Inflation Buster Program Helps Homebuyers Tame Higher Costs Through a Lower Mortgage Payment | Rocket Companies. https://www.rocketcompanies.com/press-release/rocket-mortgages-inflation-buster-program-helps-homebuyers-tame-higher-costs-through-a-lower-mortgage-payment/. Accessed 10 July 2023.
3 Bernard, T. S. (2022, September 29). Confused by the New Mortgage Gimmicks? Here’s a Guide. The New York Times. https://www.nytimes.com/2022/09/29/your-money/mortgage-guide-home-buying.html. Accessed 10 July 2023.