According to a recent Zillow poll, nearly half of recent homebuyers who obtained a mortgage did so at a rate lower than 5%. Even though mortgage rates are currently close to 7%, many purchasers who bought a home within the last year used unconventional thinking to become homeowners.
By the fall of 2023, mortgage rates had risen from historic lows of 2.65% in 2021 to a decade-high of 7.79%. The purchasing power of house shoppers was directly impacted by this. Prior to the pandemic, the average mortgage payment was 115% higher; it most recently peaked in May 2024.
Key Findings:
- Although average mortgage rates are much higher, 45% of buyers who have purchased a home in the past year report having a rate below 5%.
- Mortgage rates rose from 2.65% in 2021 to 7.79% in fall 2023, impacting home shoppers’ buying power. The typical monthly mortgage payment has more than doubled since before the pandemic.
- The most common way buyers have secured below-market rates is through special financing offers from sellers or home builders.
Homebuyers face challenges due to the volatile mortgage-rate environment, which limits their options and, in certain situations, keeps them from joining the housing market at all. Despite these obstacles, resolute purchasers are coming up with innovative ways to finance their aspirations of becoming homeowners.
According to Zillow’s survey data, 45% of recent purchasers were able to obtain a rate below 5%. Because the seller or home builder provided them with special financing, over one-third (35%) of these recent buyers were able to receive a reduced rate. Approximately 25% either borrowed from a friend or relative (23%), refinanced to a lower rate after purchasing (25%), or made their offer subject on a rate buydown (26%).
“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 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.
A shorter loan term, such a 15-year mortgage, is an additional choice that homebuyers should consider. These shorter loans have significantly lower interest rates, which means that less of a homeowner’s monthly payment is going toward interest, but they also have much higher monthly payments because the loan is being paid off faster.
To make an informed choice that fits a borrower’s unique monthly budget, speaking with a loan officer is advised in order to evaluate affordability and choose the best course of action.
To read the full report, including more data, charts, and methodology, click here.
