Builder rate buydowns, closing cost help and Flex Cash can be great. They can also hide a better option. Here is how to compare the whole deal, not just the advertised rate.

If you have been shopping for new construction around Huntsville or North Alabama, you have probably seen some pretty attractive offers. Low promotional mortgage rates. Closing cost assistance. Rate buydowns. Upgrade credits. Flex Cash. When a builder is advertising a mortgage rate well below what you have been hearing elsewhere, the obvious question is, why wouldn''t I take the lower rate? Sometimes you absolutely should. Builder incentives can create excellent opportunities, particularly on inventory homes or when a builder is trying to close out a community or meet sales goals. But here is the important part. The lowest advertised mortgage rate does not automatically mean the lowest cost or best overall deal. Before choosing a home based on the financing incentive, it is worth understanding exactly what you are being offered, and comparing the entire transaction. HOW CAN A BUILDER OFFER A BELOW MARKET RATE? Builders can use financial incentives to help sell homes. One of those incentives is a mortgage rate buydown, where money is contributed toward reducing a buyer''s borrowing cost. That can take different forms. Permanent rate buydown. Discount points or other permitted funds are used to obtain a lower interest rate that applies for the life of the loan. Temporary rate buydown. Your payment is reduced for a limited period before increasing to the payment based on the full note rate. With a 2-1 buydown, payments may initially be calculated using a rate two percentage points below the note rate during year one and one percentage point below it during year two. After that, payments are based on the full note rate. The important distinction is that a temporary buydown does not permanently change the mortgage''s note rate. So the first question to ask when you see an unusually low advertised rate is simple. Is that rate permanent, or temporary? WHAT ARE MORTGAGE POINTS? Another term you will hear is discount points. A mortgage point is an upfront charge associated with obtaining a lower interest rate, and one point equals 1 percent of the loan amount. On a 350,000 dollar mortgage, one point is 3,500 dollars and two points is 7,000 dollars. There is no universal rule saying one point lowers a rate by a specific amount. That depends on the lender, loan type and market conditions. And importantly, the buyer is not necessarily the person paying for the points. Depending on the transaction and loan program, a seller, builder or another permitted party may contribute toward financing costs. That can make a builder funded rate buydown genuinely valuable. But there is still another question to ask. What would the deal look like without the buydown? COMPARE THE ENTIRE DEAL, NOT JUST THE RATE Imagine you are considering three homes. Home A is a new construction home with a very low promotional mortgage rate. Home B is another new construction home with a higher rate but a lower purchase price or different incentives. Home C is a resale home with traditional financing where the seller may be willing to negotiate on price, closing costs or other terms. Which is the better deal? There is not enough information to know. The interest rate is important, but it is only one number in a much larger transaction. You should compare purchase price, loan amount, interest rate, APR, permanent versus temporary buydown, discount points, lender fees, down payment, closing cost assistance, builder or seller credits, price reductions, upgrade or design credits, total cash required at closing, monthly principal and interest, property taxes, homeowners insurance, HOA fees, how long you expect to own the home, and how long you expect to keep the mortgage. A lower interest rate can save substantial money. So can a lower purchase price. So can reducing the amount of cash you need at closing. The best option depends on your circumstances and the actual numbers. PAY ATTENTION TO APR, BUT DO NOT STOP THERE The advertised number that gets everyone''s attention is usually the interest rate. You should also look at the APR, or Annual Percentage Rate, which incorporates the interest rate along with certain costs associated with obtaining the mortgage. That can make it useful when comparing financing offers. But neither the interest rate nor the APR should be considered in isolation. The better approach is to compare actual Loan Estimates for similar loan products. Loan Estimates use a standardized format designed specifically to make mortgage offers easier to compare. ASK WHAT OTHER INCENTIVES ARE AVAILABLE This is where things can get particularly interesting with new construction. A builder may offer some combination of rate buydowns, closing cost assistance, price reductions, upgrade allowances, design center credits, Flex Cash, appliance packages and other incentives. But those incentives are not necessarily cumulative. You might have a choice between putting a builder incentive toward a lower mortgage rate, reducing your closing costs, receiving upgrades, or taking another available option. So do not simply ask what your best mortgage rate is. Also ask what other incentives are available if you do not take that rate. That is when you can begin comparing the actual value of the alternatives. HOW LONG WILL YOU KEEP THE MORTGAGE? This is one of the most overlooked parts of the calculation. Suppose obtaining a lower permanent interest rate requires several thousand dollars in additional upfront costs. The lower payment may eventually recover that expense. But how long will that take? If you sell the home or refinance before reaching that break even point, the lower rate may not have saved enough to offset the upfront cost. If you expect to keep the mortgage for many years, the calculation can look very different. That is why it makes sense to compare the financing over several realistic timeframes, not simply over 30 years because you happen to be getting a 30 year mortgage. Ask your lender to show you the numbers if you keep the loan for a few years, an intermediate period, and the longer term. The answer may surprise you. DO NOT FORGET THE HOUSE WHILE COMPARING THE MORTGAGE A great mortgage does not automatically make a particular house the right purchase. When comparing new construction with another new home or a resale property, consider what is actually included. Depending on the property, that could mean lot premiums, structural upgrades, flooring, countertops, appliances, window coverings, fencing, landscaping, irrigation, gutters, garage features, HOA fees, builder warranties, energy efficiency features, expected maintenance, property taxes, location and commute, and future development around the community. A resale home might already include improvements that would cost thousands of dollars to add to a new home. A new home may offer warranties, newer systems, greater energy efficiency and lower near term maintenance. Neither is automatically better. Compare the homes and the financing, not just the mortgage advertisements. WHAT ABOUT SELLER AND BUILDER CONTRIBUTIONS? Seller and builder contributions can be extremely useful, but the amount and permitted use of those funds depends on the loan program and transaction. Different conventional and government backed loans have different rules governing financing concessions and interested party contributions. That means a builder or seller cannot necessarily give every buyer an unlimited amount toward every expense. This is one of the reasons your lender should be involved early. A qualified lender can determine which incentives are permitted with your particular financing and how they can be structured. WHY HAVING YOUR OWN REALTOR MATTERS WITH NEW CONSTRUCTION Another common misconception is that you do not need your own REALTOR when buying directly from a builder. You can certainly purchase new construction without buyer representation, but it is important to understand the roles involved. The builder''s sales representative represents the builder. The lender handles the financing. Your REALTOR can help represent your interests in the real estate transaction. That may include helping you compare new construction and resale properties, evaluate comparable sales, compare communities and locations, understand available builder incentives, evaluate the overall transaction, identify questions to ask the lender, coordinate independent inspections, review deadlines and contract provisions within the REALTOR''s professional role, negotiate where opportunities exist, and keep the transaction moving toward closing. There is also an important practical consideration. Some builders have specific requirements regarding when a buyer''s REALTOR must be identified or registered. If you are considering using your own agent, the safest approach is to talk with that agent before your first visit to the builder or model home. BUILDER INCENTIVE COMPARISON CHECKLIST Before choosing a home because of an advertised financing incentive, compare the purchase price, loan amount, interest rate, APR, permanent or temporary rate, discount points, loan fees, down payment, closing cost assistance, builder or seller credits, available price reduction, upgrade and design incentives, required or preferred lender, cash needed at closing, monthly payment, taxes, insurance, HOA, what is included with the home, inspection rights, warranty, expected ownership period and expected mortgage period. Then compare the same numbers with at least one reasonable alternative. THE BOTTOM LINE A builder''s promotional mortgage rate can be an excellent incentive. There is nothing inherently wrong with builder financing, preferred lenders or rate buydowns. In some transactions they can create substantial savings for the buyer. The mistake is simply assuming that a lower advertised rate equals a better overall deal. Sometimes it will. Sometimes a price reduction, closing cost contribution, different financing structure or another property may produce the stronger overall result. The only way to know is to compare the numbers. CONSIDERING NEW CONSTRUCTION IN HUNTSVILLE OR NORTH ALABAMA? If you are looking at a new construction community, you do not have to figure all of this out after you have already walked into the sales office. Contact me before your first builder visit. I can help you compare the properties, communities, available incentives and overall real estate transaction, while your lender can help you evaluate the financing options and determine which loan structure works best for your circumstances. The goal is not simply to get the lowest number advertised on a sign. It is to make sure you are getting the right home and the right overall deal. Chris Kelly, REALTOR | MRP Weichert, Realtors, The Space Place move256.com Builder incentives, mortgage products, rates and program requirements vary and may change without notice. Eligibility depends on the borrower, property, lender and loan program. Chris Kelly and Weichert, Realtors, The Space Place do not provide mortgage lending, legal or tax advice. Buyers should consult the appropriate licensed professionals regarding their individual circumstances.

Weichert, Realtors
The Space Place — Huntsville

That Low Builder Mortgage Rate Looks Great, But Is It Actually the Better Deal?