Homebuyers Can Score 1.99% Mortgage Rates on a New-Construction Home

After a slow summer for home sales, buyers are making it clear that newly built homes are in, with new-home sales jumping 20.5% higher in August.

In comparison, pending home sales edged up just 4% in the same month, according to the National Association of Home Builders.

Among the reasons was easing mortgage rates. Rates for a 30-year fixed home loan ticked up last week to 6.3% for the week ending Sept. 25, according to Freddie Mac—after three straight weeks of declines.

But homebuilders are offering new-home incentives ranging from appliance packages to covering closing costs. Some buyers can even qualify for reduced rates for a home loan, with special financing rates as low as 1.99% for the first year.

"I would say the most important thing for a buyer who is being offered an attractive interest rate to get into homeownership is to take a real look at their financial reality and approach the decision with open eyes," Jessica Vance, a San Diego real estate agent and mortgage broker, tells Realtor.com®.

"Unfortunately, I have seen the other side of this, where homeowners face losing their home due to unforeseen circumstances or a financial situation that does not improve with time."

The fine print

Not all terms are the same for the special reduced-rate financing, but for Texas builder Starlight Homes, its incentive applies to payments for principal and interest only for a 30-year fixed mortgage. The offer can be applied to the purchase price of $269,900.

A 4.99% rate on a 30-year fixed Federal Housing Administration loan with a 3.5% down payment is required, and a 620 credit score. The 3/2/1 Program includes a 3% decrease on the interest rate for Year 1—bringing the limited-time offer to 1.99%. Then, a 2% decrease in the interest rate for Year 2 (2.99% rate), and a 1% decrease on the interest rate for Year 3 (3.99% rate).

It will be in Year 4 of the 30-year fixed FHA loan that the 4.99% applies to the remainder of the loan life.

"For homebuyers who take advantage of the low-rate incentives, I would suggest they should budget by taking the money they will be paying on future mortgage payments and putting it aside to help offset the remaining years," Vance adds.

She also advises that before entering into any mortgage, borrowers should do a financial assessment and to cut any unnecessary expenses or subscriptions.

Brand-new homes

The sales of newly built single-family homes were on the rise in August. It was 15.4% higher than the same time a year prior. The three-month moving average of new-home sales was 713,000—an increase from 656,000 in July, according to NAHB.

A new-home sale happens when a sales contract is signed or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction, or completed.

Signed contracts for new single-family homes at a seasonally adjusted annual rate stood at 800,000 in August. That's up 21% from July and 15% from the same time one year ago, according to the U.S. Census Bureau and Department of Housing and Urban Development.

The median new-home sale price was $413,500—that's also up 1.9% from a year ago.

An NAHB survey data shows 37% of builders reported cutting prices in August and 66% reported using sales incentives. That strategy has spilled into October with the slew of homebuilders offering incentives.