Hungry mortgage lenders are dangling deals and discounts

Slashed rates. Discounts on future purchases. Speedy delivery.

No, these are not the promises of an auto dealer or eager e-retailer start-up. They’re coming from mortgage lenders.

The incentives reflect the harsh reality of the residence-financing scene.  Since 2021, mortgage rates have more than doubled. The predictable result: American consumers — especially homebuyers — have sharply reduced their appetite for borrowing. Mortgage originations plunged by 57 percent from the fourth quarter of 2021 to the fourth quarter of 2022, ATTOM Data Solutions reports.

The drop in applications puts lenders in a tough position — and, like any seller in a slow market, they’ve responded by dangling deals to get homebuyers to look past the run-up in rates. They’re offering temporary rate cuts in purchase loans and discounts on refinances. One big lender even has initiated a rewards program echoing those used by retailers, airlines and credit cards.

Here’s how to navigate the borrower-friendly strategies lenders are offering, now that rock-bottom rates no longer are driving business.

Rate buy-downs: A year of savings

In recent months, Rocket Mortgage has heavily marketed its Inflation Buster program, a temporary rate buy-down that lowers the borrower’s mortgage interest rate by a percentage point for the first year of the loan.

Say you borrow $400,000 for 30 years with an interest rate of 6.5 percent. Your principal and interest would be $2,528 a month. With the rate buy-down, your rate drops to 5.5 percent for 12 months, and your payment falls to $2,271. That means savings of $257 a month and more than $3,000 over the first year of the mortgage.

Rocket’s deal is limited to purchase loans (refinances aren’t eligible), but it’s available on conventional, FHA and VA mortgages. “It’s a way to provide an immediate and meaningful reduction to the payment, at least for the first year,” says Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

“A lot of people say, ‘What’s the catch?’ There is no catch,” he adds. “We are giving away free money.” In fact, Rocket told investors during an early March earnings call that the Inflation Buster program squeezed its profits in the fourth quarter of 2022 – telling evidence that it is, indeed, a good deal for borrowers.

Rocket isn’t the only major lender to offer lender-paid rate reductions. United Wholesale Mortgage includes the promotion as part of its Game On marketing effort, while Mr. Cooper has packaged its version as the 1% Mortgage Markdown.

Greg McBride, Bankrate’s chief financial analyst, says it makes sense for homebuyers to take advantage of rate buy-downs – just with a reminder not to rely on the reduction long-term.

“The monthly savings for borrowers at the outset of the loan are real, not unlike getting a discounted monthly rate in the first year of a new wireless contract or cable TV subscription,” McBride says. “The caveat is to build your budget around the higher payment that eventually kicks in and not get too accustomed to the temporarily lower payment. Perhaps put the difference in monthly payment into an online savings account to replenish some of what may have been used on closing costs and move-in expenses.”

Refinance savings: A bet on lower rates

The interest rate rise affected not just purchase loans, but the refinance business: With mortgage rates flirting with 7 percent as of Bankrate’s March 8 national survey of lenders — double what they were a year ago — there’s little incentive for mortgage-holders to swap out their old loans.

Many housing economists expect mortgage rates to fall below 5.5 percent by the end of 2023. If that scenario plays out, it might make sense for today’s homebuyers to refinance in the not-too-distant future. Even so, refinancing ain’t cheap – closing costs can total 3 percent to 5 percent of the amount of the loan.

The big lenders know that, so they’re trying to sweeten the pot for future refis. Rocket, for example, has responded with what it calls Rate Drop Advantage. A borrower who finances a purchase with Rocket gets discounted closing costs when refinancing between four months and three years after the initial closing. A lender credit at closing will cover fees for appraisal, credit report, recording and other costs. The savings total about $2,000, Banfield says.

Mr. Cooper has a similar promotion, known as Rate Swap. The lender says it’ll knock $1,500 off a future refinance.

A smaller lender, Flyhomes Mortgage, is offering an even better deal. The company says that on a future refinance, it will waive its lender fee and pitch in for third-party closing costs. On its website, Flyhomes shows a hypothetical scenario in which the borrower saves nearly $5,000 in closing costs on a refinance.

Other enticements: Fast results and bonus points

Lenders are turning up the volume on a variety of other blandishments. One enticement comes in the form of a fast answer on your mortgage application.

Ally Bank promises applicants preapproval within three minutes. Better.com promises a commitment letter, complete with locked-in rate, in 24 hours, a program it’s dubbing “One-Day Mortgage”; it’ll even throw in $1,000 in lender credits to be applied to closing costs. The name’s a bit of a misnomer, though: While commitment comes fast, it could still take weeks to get to the closing table and actually get your loan.

Touting speedy results is not really new in the industry. For several years, for example, Movement Mortgage has promised qualified applicants fully underwritten preapproval in six hours, complete loan processing within a week and closing in one day. Still, emphasis on an expedited process may resonate more with borrowers now, given the way rates skyrocketed in 2022 — even causing some homebuyers to back out of their contracts.

Rocket Mortgage, for its part, is taking a page from the likes of Starbucks and American Airlines. Its new Rocket Rewards program lets potential homebuyers 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, the equivalent of $75, just for signing up for an account. The idea: Borrowers will redeem the points when they buy a home – the balance will be deducted from closing costs.

Final word

All these promotions can help borrowers feel more comfortable about buying a home at a time of high mortgage rates. Remember, though, that shopping around is perhaps the most powerful weapon in a borrower’s arsenal. The refinance promotions in particular remove that option by locking you in with a specific lender for your next refi. And, given the decades-long life of most mortgages, the rate buy-downs amount to a pretty short-term savings. So don’t let a sweet-sounding deal stop you from looking hard at all the fundamentals of a lender’s offer.