If you truly want to talk turkey with your mortgage lender or home builder this week or next, here's the money-saving way to do it: Talk about rate buydowns.
That's right. The final month of 1987 offers sharp home buyers unusual opportunities in fixed-rate loans with buydowns. The end-of-the-year buydown boom is particularly favorable for first-time purchasers, but can also be turned to your advantage in resales, move-ups and even refinancings.
So what's a buydown? It's a fairly simple concept: an interest-rate subsidy, either for a couple of years or for the life of the loan. You've probably seen the ads in the newspaper offering fixed-rate 30-year mortgages or deeds of trust at 8 1/2 or 9 percent for the first year. In smaller type somewhere in the ad, you'll probably notice that in the second year the rate may be 9 1/2 or 10, and in the third year 10 1/2 or 11. After that, the rate remains frozen for as long as you keep the mortgage.
Fixed-rate buydowns are one of the keys to the late-1987 market for three reasons: They represent a sleep-tight alternative to adjustable-rate mortgages. In the wake of the Wall Street collapse, many consumers have jitters about signing up for adjustables that can rise by 6 percentage points. Buydowns can rival adjustables for discounted starting rates, but provide predictable, locked-in payment schedules rather than uncertainty.
The Federal Housing Administration loosened up its buydown rules for home loans last month. The National Association of Home Builders is pressing the nation's two largest mortgage money sources -- the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) -- to do the same. Both are based in Washington and buy billions of dollars worth of local home loans each year.
Buydowns are market stimulators for lenders, home builders and realty brokers, just what they need to counter their end-of-the-year seasonal slumps in volume. Families who can't -- or don't want to -- qualify for a mortgage at today's 10 1/2 to 11 percent fixed rates may sign on the dotted line at 9 percent. Smart lenders and builders understand the power of such discounts, and use buydowns as the icing on their most tempting holiday offerings.
Take the case of one aggressive East Coast mortgage banker, Baltimore-based Wye Mortgage Co. Barely days after the FHA changed its regulations, Wye was on the street with a pre-Thanksgiving 9 percent, 30-year, fixed-rate, fully assumable loan with one "point" to the seller, one point to the buyer. A point is equal to 1 percent of the original mortgage amount, and is payable at settlement.
Wye's plan is certain to be duplicated by mortgage bankers in many metropolitan markets. It takes advantage of FHA's new willingness to allow a 2 percentage point initial rate subsidy, rather than just one percentage point. The borrower pays a fixed rate of 9 percent the first year, 10 percent the second, 11 percent from the third year on. The direct competition to the Wye plan is the FHA's own adjustable-rate mortgage. Both loans allow low down payments, hence their special attractiveness to first-time buyers.
But the FHA adjustable starts at 9 percent in the current market, plus 3 points payable by the seller and one point payable by the buyer. Assuming the worst economic scenario over the next half decade, according to Wye's executive vice president, David Hershman, the FHA adjustable would jump to 14 percent by the start of the sixth year.
"Why would anyone want to expose themselves to such risk, when they can go with a fixed-rate that starts at 9 -- the same as the ARM -- and can never exceed 11?" Hershman asked.
Home builders are asking the same question. Aggressive builders not only are using the new FHA buydown concept, but also are custom-crafting deeper buydowns for end-of-the-year applicants.
The traditional favorite for builders is the so-called "3-2-1," involving a 3 percentage point subsidy the first year, 2 points the second, 1 point the third. Beginning in the fourth year the rate reflects the true market cost of money prevailing at the time of commitment -- about 11 percent now.
Although Fannie Mae and Freddie Mac loan rules effectively exclude use of 3-2-1 buydowns for most low down payment mortgages, home builders are trying to convince the big lenders to loosen up slightly, and to encourage them.
If they succeed, look for even more buydown action. Even if they don't, keep a sharp eye on the money marketplace. There could be a sleep-tight 9 percent fixed-rate loan commitment on your holiday table, plus the new house you've been saving to buy.