Reduced prices. Discounts on future purchases. Fast delivery.
No, these aren’t the promises of a car dealership or an eager e-tailer startup. They come from mortgage lenders.
The incentives reflect the harsh reality of the home finance scene. Mortgage rates have more than doubled since 2021. The predictable result: American consumers — particularly homebuyers — have sharply reduced their borrowing. Mortgage origination fell 57 percent from Q4 2021 to Q4 2022, reports ATTOM Data Solutions.
The drop in applications puts lenders in a difficult position — and like any seller in a down market, they have responded by floating deals to get homebuyers to look beyond the rise in interest rates. They offer temporary interest rate reductions on purchase loans and discounts on refinancing. One major lender has even initiated a rewards program to match those of retailers, airlines and credit cards.
Here’s how to navigate the borrower-friendly strategies lenders are offering now that rock-bottom interest rates are no longer driving business.
Rate Buy-Downs: A Year of Savings
In recent months, Rocket Mortgage has been heavily touting its Inflation Buster program, a temporary rate buyback that lowers the borrower’s mortgage interest rate by one percentage point for the first year of the loan.
Suppose you borrow $400,000 for 30 years at an interest rate of 6.5 percent. Your principal and interest would be $2,528 per month. With the interest discount, your interest rate drops to 5.5 percent for 12 months and your payment to $2,271. That means savings of $257 per month and more than $3,000 in the first year of the mortgage.
Rocket’s deal is limited to buying credit (refinancing is not eligible), but it’s available for conventional, FHA, and VA mortgages. “It’s an opportunity to immediately and significantly reduce the payment, at least in the first year,” said Bill Banfield, executive vice president of capital markets at Rocket Mortgage.
“A lot of people say, ‘What’s the catch?’ There’s no catch,” he adds. “We’re giving away free money.” In fact, Rocket told investors during a conference call in early March that the Inflation Buster program squeezed its earnings in the fourth quarter of 2022 — proving it is indeed a good deal for borrowers.
Rocket isn’t the only major lender offering lender-paid rate cuts. United Wholesale Mortgage is including the promotion as part of its Game On marketing efforts, while Mr. Cooper has packaged its version as a 1% mortgage discount.
Greg McBride, Bankrate’s chief financial analyst, says it makes sense for homebuyers to take advantage of interest rate declines — just with a reminder not to rely on the reduction over the long term.
“The monthly savings for borrowers at the beginning of the loan are real, no different than a discounted monthly rate for the first year of a new cell phone or cable TV subscription,” says McBride. “The caveat is to build your budget around the higher payment that eventually kicks in and not get too used to the temporarily lower payment. Perhaps put the difference in the monthly payment into an online savings account to top up some of what may have been used for closure costs and moving-in costs.”
Refinance Savings: A bet on lower interest rates
The rise in interest rates affected not only purchase loans, but also the refinancing business: with mortgage rates flirting with 7 percent – twice the level of a year ago – according to Bankrate’s nationwide survey of lenders from March 8 – there is little incentive for mortgage holders to exchange their old ones loans.
Many real estate economists expect mortgage rates to fall below 5.5 percent by the end of 2023. If this scenario plays out, it could make sense for today’s homebuyers to refinance in the not-too-distant future. Still, refinancing doesn’t come cheap — closing costs can be 3 to 5 percent of the loan amount.
The big lenders know this, so they try to sweeten the pot for future refis. For example, Rocket reacted with the so-called Rate Drop Advantage. A borrower who finances a purchase with Rocket receives a discounted closing cost when refinancing between four months and three years after the initial closing. A lender-on-closing credit covers appraisal, credit report, record-keeping, and other fees. The savings total about $2,000, says Banfield.
Mr. Cooper has a similar action known as a Rate Swap. The lender says it will save $1,500 on a future refinance.
A smaller lender, Flyhomes Mortgage, offers an even better deal. The company says it will waive its lender fee and sponsor third-party closing costs on any future refinancing. On its website, Flyhomes shows a hypothetical scenario in which the borrower saves nearly $5,000 in closing costs when refinancing.
Other temptations: Fast results and bonus points
The lenders turn up the volume on a variety of other flattery. An enticement comes in the form of a quick response to your mortgage application.
Ally Bank promises applicants pre-approval within three minutes. Better.com promises a letter of commitment with a fixed interest rate within 24 hours, a program it calls “One-Day Mortgage”; It even throws in lenders of $1,000 that can be applied to closing costs. However, the name is a bit misleading: while approval is quick, it can still take weeks to get to the closing table and actually receive your loan.
Touting quick results isn’t really new to the industry. For example, for several years, Movement Mortgage has promised qualified applicants a fully signed pre-approval in six hours, a full loan processing within a week, and a close in a day. Still, the emphasis on an expedited process may resonate more with borrowers now given how interest rates have skyrocketed in 2022 — even causing some homebuyers to walk away from their contracts.
For its part, Rocket Mortgage takes its cues from companies like Starbucks and American Airlines. The new Rocket Rewards program allows prospective homebuyers to earn points by completing various activities on the company’s website, including watching videos, reading articles about homeownership and using a mortgage calculator.
Members can earn 7,500 points, which is equivalent to $75, just for signing up for an account. The idea: Borrowers redeem the points when buying a house – the remaining amount is deducted from the closing costs.
Last word
All of these promotions can help borrowers feel more comfortable about buying a home during a time of high mortgage rates. However, remember that shopping is perhaps the most powerful weapon in a borrower’s arsenal. The refinance promotions specifically remove that option by locking you in with a specific lender for your next refinance. And given the decades-long lifespan of most mortgages, the interest markdown amounts to a fairly short-term saving. So don’t let a great-sounding deal stop you from taking a close look at all the basics of a lender’s offer.
