mortgage

Dirt-cheap loans on new homes

Highlights
  • Major builders offer buy-downs to entice buyers to new developments.
  • Buy-downs can mean substantial savings over a 30-year loan term.
  • Buyers must be well-qualified to be offered a buy-down.

Would you buy a brand-new home if you could lock in an interest rate of, say, 3.63 percent on a 30-year mortgage? Homebuilders who've offered to "buy down" buyers' interest rates hope your answer will be yes.

Interest-rate buy-downs aren't new. In fact, builders, private home sellers and buyers have long been able to pay an extra fee to buy down the interest rate on a home loan.

The extra fee, payable upfront, is priced in "points," and each point is equal to 1 percent of the loan amount. For each point (or partial point) that's paid, the interest rate on the loan is reduced by a set amount that's determined by the lender. Homebuilders that offer the incentive pay the extra points on the borrower's behalf as an inducement for him or her to buy a home.

Some buy-downs are temporary, which means the interest rate is reduced only for one, two or three years, after which the rate rises to a fixed figure for the remainder of the term. But most builders today offer a buy-down that's good for the full 30-year term of the loan.

Dan Klinger, president of K. Hovnanian American Mortgage in Boynton Beach, Fla., describes the buy-down as "the incentive that keeps on giving."

"Over a 30-year period, it's a tremendous amount of savings," he says.

Gopal Ahluwalia, vice president of research at the National Association of Home Builders, or NAHB, in Washington, D.C., also says that the savings can be significant. For example, a buy-down from 5.5 percent to 4.5 percent on a $200,000 loan amount would lower the borrower's principal and interest payment from $1,135 to $1,013, a monthly savings of $122.

A buy-down may help some new-home buyers qualify for a loan because the lower monthly payment improves the borrower's debt-to-income ratio, Klinger says.

The caveat is that not all buyers can qualify for a buy-down. The guidelines vary from one builder to the next, but a strong credit score and a comfortable down payment often are required.

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"When you read the fine print on these interest rates, (it says that) you need to be a very well-qualified homebuyer," says John Burns, president of John Burns Real Estate Consulting in Irvine, Calif.

Buy-downs lure new-home buyers

Buy-downs, upgrades and other incentives are especially important today because the new-home market has been in a slump. Sales of new-built, single-family homes increased 4.7 percent, to a seasonally adjusted annualized pace of 337,000 units in February 2009, compared with 322,000 units in January, according to the U.S. Department of Commerce. Those figures were dwarfed by the February 2008 pace of 572,000 units and the 2005 annual total of 1.2 million new homes sold.

An excess supply of for-sale new homes has been a problem for builders as well. In 2005, the supply was only 4.8 months at the pace of sales in that year. The supply rose to 9.7 months in February 2008 and then increased to slightly more than 12 months in early 2009. That means it would take a year for builders to sell all homes they've already constructed at the current pace of sales. Buyers can expect that builders will continue to offer inducements until that standing inventory is reduced.

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