Rate buy down – common or not? scam?

[23109VC]

talked to a realtor who said some of the builders won’t budge much on price but they will do “buy downs” on interest rates.

I was led to believe that there are builders who will buy down the rate to 1% for up to 3 years. So say you buy a $500k house… the builder would sell the price at or near asking.. BUT they will pay ANY interest over 1% for 3 years.

i was also told that you could work out a deal like this and still negotiate a low interest rate on a 30 year FIXEd loan….NOT AN ARM…. and the builder will pay all interest above 1%. so you’re getting short term SUPRE low payments (kind of like what an ARM or neg. am. loan would do) except that the builder is paying the interest…and you can StILL have the loan at a fixed rate.

it sounds good but there must be a catch. if you assume you bought a home at $500k…and the builder picked up the interest for 3 years.. that’s a lot of money saved over 3 years.

what’s the catch?

[Anonymous]

I believe what you are talking about is a interest rate buydown at 1% per year for up to three years. The builder has the option of buying down the interest rate so you will have a payment savings for three years. Say the interest rate on the 30 year fixed was 6.75%. The builder buys the rate down and your interest rate is 3.75% the first year, 4.75% the second, 5.75% the third, and 6.75% for years 4-30. This is very common and can add up to significant savings over those first few years.

[Anonymous]

The catch? More prop tax, distorted mkt prices

If the builder gives $20,000 savings off the price of the home, previous buyers are unhappy and the lower price impacts the entire market, including the builder’s remaining inventory.

Giving the savings in the form of an interest buy down hides the decline in the cash value of the property.

Another catch is that $20,000 in interest savings is much less valuable than a $20,000 price cuts. If you got the price cut, you’d get a tax deduction for the additional mortgage interest you’d be paying and you would have a lower property tax bill for as long as you own the home.

If you think you need a $20,000 price cut to buy, you should be asking for a higher interest buydown – say, $30,000.

[Anonymous]

Are you kidding me?

The additional property tax on $20,000 is $250/year or $7500 over 30 years.

The savings on an $800K mortgage at the interest rates above equals:

@ 3.75% = $24,000 over the 6.75%
@ 4.75% = $16,008 over the 6.75%
@ 5.75% = $8004 over the 6.75%

for a total savings of $48,012 over the first 3 years.

Watch out for that extra property tax! (which is tax deductible too)

[waiting hawk]

That is fine and dandy for the short term (which is what this whole market is), why don’t you post the payments with that 3 year period and THEN post the payment after the short term 3 year catch expires? On 800k

[Anonymous]

No problem!

IO payments are:

$2500
$3166
$3833
$4500

No matter what the payments are or how you look at it, you are better off paying the extra $20K and taking the interest rate buydown instead of telling the builder that you want the $20K savings off the purchase price and paying the extra $48K in interest payments.

[Cow_tipping]

Its somewhat common. Builders tell people, “yea, you can always sell it for more in 3 years and move up with your larger down payment. So you get the low payments for 3 years and then what do you care. you anway will mae out like bandits when you sell it”
Of course, that means, you get a over priced house with a un proportionatly low payments, and if you sell in 3 years cos you cant move up cos you owe more than your house is worth …
Oh yea, the 3 years … ended last week.
Its all because people have only been thinking how much a month.
Cool.
Cow_tipping.

[cr]

I don’t think anyone commented on the opening line about builders not budging on price. Is that realistic?

Can builders afford to leave how ever many vacant homes they have, empty for years while prices around them plummet?

I don’t think anyone would argue prices where most of the massive new developments have been built are going to be hit the worst. Won’t that just leave the new homes empty longer?

Who cares about a 1-3% lower interest rate for 4 years, if the house 2 streets over, albeit previously lived in, is $200,000 dollars less?

[Author]

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