The days of the buy downs are back from their glory years in the 80’s when interest rates were in the teens. Honestly, I was too young to know any of that at the time, but I have heard about the ridiculously high rates of years gone by from many of my more seasoned borrowers. Their tales of double digit rates are quite shocking considering the highest fannie mae rate for a 30 year fixed I have seen in my 11 years as a mortgage expert was about 8%. NOW, we are seeing as low as 4.5% for a 30 year fixed. Could you imagine getting a rate as low as 3.75%? Well it is happening.
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. Home builders that offer the incentive pay the extra points on the borrower’s behalf as an inducement for him or her to buy a home.
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.
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. But 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.
Many Realtors are taking their prospective buyers to the new construction communities for not just the upgrade and closing costs incentives, but also the rate buy downs. With so many existing homes being upside down and in foreclosure, there just simply isn’t any room left for the seller to buy down the rate or pay closing costs many times. Who doesn’t want a new home anyway?
Buyers who want to take advantage of a builder-paid buy-downs 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 home ownership. 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 some body’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 home builders 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.
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 may 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.”
Some content By Marcie Geffner • Bankrate.com