Some home builders offer mortgage rates as low as 3%. Here’s how – and why – they do it.

Homebuilders are playing hardball by offering mortgage rates as low as 3% on new homes to stimulate buyer demand. So how and why do they do this?

For starters, homebuilders are feeling a lot less gloomy these days as mortgage rates drop and buyer demand increases. Demand for mortgages surged on Wednesday as buyers rushed to drive rates down.

“There is considerable pent-up demand for people to get into home ownership,” Jason Will, senior vice president of market growth at Embrace Home Loans, told MarketWatch. The lender is based in Newport, RI, and originated more than $6.5 billion in mortgages in 2022 for 20,000 homeowners.

Some builders up the ante by offering very low interest rates to buyers.

In California, Pacific Point Communities offers a 4-bedroom home at a mortgage rate “as low as 2.75%”.

In Texas, Pulte Homes offers a 30-year fixed rate mortgage at 4.25% for single family homes with three to five bedrooms.

And in various parts of the country, K. Hovanian offers a 4.99% fixed rate mortgage.

Still, the 30-year fixed-rate mortgage is at 6.04%, according to Mortgage News Daily, which is still double what it was a year ago.

By offering to lower buyers’ mortgage rates, these homebuilders are making concessions instead of reducing prices to lure buyers stuck on the sidelines.

How exactly can manufacturers offer such low prices?

Homebuilders have more margin built into their financial model, allowing them to offer greater concessions to homebuyers, Embrace’s Will explained.

Margin refers to the profit builders make from selling a new home, after taking into account construction costs and other expenses.

“They are able to use [that] to fund permanent and temporary buyouts that allow lenders to offer lower introductory rates,” Will continued.

A mortgage rate buyout occurs when a seller pays to reduce the buyer’s mortgage rates by a certain number of points for a certain number of years (or permanently).

The process is complex on the back-end. Embrace Home Loans works months in advance with a builder to “lock in” mortgage rates with a term commitment.

Once the builder comes to the lender and says they expect a set number of buyers for their units, Embrace buys options, Will explained, and locks in rates before the homes are sold.

Some builders are eating the difference between the prevailing mortgage rate and what consumers will accept, just to move inventory and gut homes on their backs.

Then these “locked” mortgages with fixed low rates are passed from the builder to the potential buyer. “And so it’s a way for the automaker to create a competitive advantage,” Will said.

Simply put, some builders are eating the difference between the prevailing mortgage rate and what consumers will accept, just to move inventory and gut homes on their backs.

“Buying incentives were widespread and construction costs were generally high, putting downward pressure on builder margins,” the Dallas Fed reported in the Federal Reserve’s Beige Book survey.

Builders are also lowering mortgage rates to circumvent the price reduction because it can affect the value of homes that have already been sold, Will said, as well as their ability to raise prices for future homes.

Economists expect mortgage rates to continue falling over the course of the year. This is undoubtedly good news for the many buyers who return to the real estate pool.

“We saw a few quarters of stagnation as consumers waited” for rates to come down, Will said. “And now we’re seeing green sprouts of it – they’re starting to come back into the market.”

Do you have ideas on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at


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