A 24-year-old homebuyer whose builder paid for a lower mortgage interest rate said it was what he needed to purchase his first home

• Higher mortgage rates led to a dramatic downturn in homebuyer demand last year.
• Sales have fallen and new home construction has stalled in some markets.

As higher mortgage rates drag down housing demand, US homebuilders are pulling out all the stops to keep potential buyers interested in their houses.

Christian Ogata, 23, a police officer from San Bernardino County is just one of many homebuyers who have been offered a mortgage interest rate buydown — an upfront payment for "discount points" at closing that temporarily reduces the rate on a fixed-rate mortgage — from a homebuilder to seal the deal on a home purchase.

The program helped him become a first-time homeowner in sunny California this past December.

"While exchanging communication with my lending officer, it was brought up by him," Ogata told Insider. "He basically said 'Hey, you know, the builder's offering this program which is kind of new, and basically we get a lower rate for the first year and once that year is over, then it will go through the normal rate you would have locked in.'"

To secure the buydown, Ogata's homebuilder, PLC Communities, requested a $2,000 deposit — which was ultimately refunded when closing the deal — for a mortgage rate lock. After signing the paperwork, he received the keys for his $600,000 3-bedroom and 2.5-bath home.

Thanks to the deal, he received a 1% buydown. During the first year of his loan, Ogata will have an interest rate of 6.1% for a 30-year-fixed mortgage rate. Once the year is completed, his interest rate will climb to 7.1%. By then, he hopes "rates will have come down," allowing him to refinance his home at a much lower cost.

"It sounds a little too good to be true," Ogata said, adding that the deal was "really good news" since it will allow him to save money in the first year that can be put towards upgrades for the home.

After a year of rapid growth in housing costs, fewer Americans are pursuing homeownership — so much so that mortgage demand fell to a 26-year low in December, according to the Mortgage Bankers Association. This has resulted in a pullback in new home construction as well as home sales. The downturn has encouraged more homebuilders to offer buydowns, which are helping to prevent cancellations. As the program spreads, it's also helping more Americans make their homeownership dreams a reality.

"This is my first house, I've been renting for a couple years now, and it's a different feeling knowing that my money isn't just going to someone else — It's going towards a lifetime purchase."

Buydown programs are becoming more common

Dan Hanson, the executive director of Loandepot, one of the largest mortgage non-bank lenders in the country — and the company responsible for negotiating Ogata's deal — says that mortgage rate buydowns are not new to the housing market, but they are helping to reignite demand in today's high interest rate environment.

"I've been in the industry for about 40 years, every time there's a rise in interest rates and demand wanes a little bit on projects that builders have in process, they want to use incentives to help borrowers make the buying decision," he told Insider.

"For builders, it's pretty much a no-brainer because they have so much invested in the community — they don't want sales to stall," he added. "So it's been a tactic they've used for a long time and a very effective one."

A study from John Burns Real Estate Consulting shows that as of December, 75% of US homebuilders were offering mortgage rate buydowns. According to the research firm, 32% of builders were buying down the full 30-year term, while another 30% were temporarily reducing the rate for the first two years of the mortgage loan.

Ogata's homebuilder, PLC communities, has had at least 90% of their clients take advantage of mortgage rate buydowns, according to Jamie Todd, the company's vice president of sales and marketing.

"The biggest thing that triggered it was when interest rates unprecedentedly doubled in a very short amount of time," Todd told Insider. "When that happened, we had clients that had already purchased their home or were under contract and if they had not locked in their interest rate early, their payments went up by over $1,000 a month."

Needing a way to address the decline in affordability, Todd says a mortgage rate buydown program was naturally the best tool in their deck.

Ogata says the program made purchasing a home in California's costly market an easier pill to swallow.

"My philosophy was 'Yes, the housing market is expensive. Yes, interest rates are higher now, but at the end of the day, this is something that I'm putting my money into,'" he said. "I can either keep paying $3,500 for rent every month or I can put that money into my mortgage."