If you see an ad offering new houses or condominiums with 12 percent mortgages, you are not dreaming. The builder is cutting prices in a way that will most attract your attention: by giving you an eye-startling break on interest rates.

Some real estate brokers can make similar arrangements on certain houses they list for sale.

How do they do it? They're using a "buy-down mortgage," formerly limited to builder financing but now spreading to all corners of the real estate market.

When you buy a house under this plan, the mortgage is drawn for the full, current mortgage rate. But the builder, or seller, generally puts a lump sum of money in a savings account, to reduce your interest rate for a certain number of years.

The seller could have applied that same money toward cutting the base price of the house. But when it comes to financing, home buyers look first at the monthly payment. Reducing the mortgage interest rate produces a lower initial monthly payment than if the seller reduced the cost of the house itself.

For example, take an $85,000 house, needing $15,000 down and a $70,000 mortgage. At 16 percent over 30 years, monthly payments come to $940.

If the builder cuts $7,000 from the price of the house, you'd need $14,000 down and a $64,000 mortgage, cutting monthly payments to $860 -- an $80 savings. But if he left the house price at $85,000 and used that same $7,000 to buy down your mortgage rate to 12 percent for the first three years, monthly payments would drop to $720 -- a saving of $220. So the buy-down gives you a much lower payment.

The lower the payment, the more expensive a house you can afford to buy. But comparison shopping is always its own reward. Anyone looking at the figures above might ask himself whether he's better off, in the long run, by skipping the buy-down and asking for a lower house price instead.

Under a buy-down, your breathing space usually lasts from one to five years.

After that, monthly payments rise to the level you would have paid without the buy-down (perhaps higher, or lower, if you have an adjustable-rate mortgage). Higher interest payments, on the full house price, can really add up.

If the seller lowered the house price by the cost of the buy-down, you do not get as big a break on your monthly payments ($80 in the above example). But you'd pay less total interest over the mortgage term. Also, you don't need as large a down-payment.

If you plan to stay in the house for three to five years, the buy down is the better deal. But if you hope to be there 20 years, a lower house price might be better. Figure your payments both ways (if the seller is willing to take the lower-price alternative) to see which suits you best.

The National Association of Home Builders estimates that about 55 percent of homebuilders now offer buy-down contracts. Individual sellers may soon be offering buy-downs, too, thanks to recent changes in the mortgage market.

Those changes center on the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., which have announced a standard purchase plan for buy-down mortgages.

This is an important development. Banks and S&Ls need to sell their existing mortgages, in order to replenish their pool of funds and make even more mortgages. Formerly, buy-downs had a limited market. Now they can be easily sold, which means that more banks and S&Ls will be glad to provide them.

They might not do it for just one or two individual sellers. But real estate agents may arrange for blocks of funds to be used for buy-downs and recommend this arrangement to many of their customers. As a seller, you could then offer to provide a buy-down instead of cutting the price of the house.

You may even be able to recoup part of the cost by charging the buyer a little more. Mark Serepca of the American Bankers Association told my associate, Virginia Wilson, that it's not uncommon for sellers in this situation to raise the house price, "but the increase usually does not cover the buy-down's total cost."

As a home buyer, you might ask a relative to help out. If the seller won't finance a buy-down arrangement, the relative might give (or loan) you the $7,000 or so that you need to make the deal.