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Dirt-cheap loans on new homes

Buyers who want to take advantage of a builder-paid buy-down should visit several new-home developments and find out what deals are offered. That's because not all builders offer this incentive, says Stephen Melman, NAHB director of economic services.  In fact, a NAHB survey found that 29 percent of builders offered a buy-down in February 2009. A year earlier, only 16 percent said they offered this incentive. That percentage has fluctuated, yet the trend line has been upward as the housing slump has lengthened.

More than half of the builders said buy-downs were at least somewhat effective in stimulating sales, but 35 percent said they weren't at all effective. Klinger says an interest-rate buy-down offered by homebuilder Hovnanian Corp. was "not a silver bullet," but was helpful enough to entice some people off the proverbial fence of indecision into homeownership. Other builders that have offered a buy-down include Toll Bros. and Lennar Corp., neither of which would discuss this program.

Buy-down offers may be limited in scope

Burns suggests that buy-downs are an effective inducement because many buyers tend to focus on affordability and their monthly payment, sometimes even more than they focus on the price of the house.

"Getting the payment down at or below somebody's rent is a very compelling story," he says.

Naturally, there are trade-offs and restrictions. Buy-downs tend to be offered only in certain states or specific developments or on the purchase of certain models of new homes, rather than across the builder's entire inventory.

The incentives may be more prevalent in such states as Arizona, California, Florida, Nevada and Texas, where volume-oriented homebuilders have a sizable presence, Burns says. Buy-downs also are more likely to be offered on completed homes because builders have more flexibility to negotiate on those properties.

Larger homebuilders may be more likely than their smaller competitors to offer a buy-down because most of the biggest builders own an in-house mortgage company, and that may reduce their cost of the buy-down. Buyers typically are required to obtain a loan through the builder's mortgage company to take advantage of this type of offer. Buyers should remember that even if the builder offers a buy-down through a captive mortgage company, they still could find a lower interest rate or cheaper financing costs elsewhere.

Buy-down may be part of package

Most builders offer a variety of incentives and then limit the total package to a specific undisclosed sum that is often about 3 percent to 4 percent of the sales price of the house, says Melman. For example, if the builder has a figure of $10,500 in mind and the buy-down costs $9,500 in points, only $1,000 will be on offer for other incentives. That means the upgrades the buyer also wants would be included only at an additional cost, instead of as freebies. As Klinger says, "There is only so much room (to negotiate) in every deal."

If the builder is keen to make the sale and the allowance is generous, the builder might include some upgrades and even pay some or all of the borrower's closing costs as well as the points to buy down the interest rate.

"The idea is to minimize the out-of-pocket expense for the buyer because no-money-down is gone," Klinger says.

Buyers should focus on the value of the whole package. On that basis, a 30-year interest rate reduction may be much more compelling than fancier flooring or better kitchen appliances.

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