Comparing Apples to Oranges When Looking at Builder’s Incentives

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Whether you buy a new home or an older one, it is more convenient to have both the sale and the financing handled by the same people. It takes less time. There is less duplication of paperwork, and you already know the people you are dealing with, and they know you. One way builders get mortgage business is to offer incentives. If you take their financing, they may offer to upgrade the carpeting, or give you a choice of premium options from which to choose. Duncan says you are more likely to see offers like this when it is a buyer’s market, i.e., when there are more homes available than there are buyers. As a result, this is often a regional issue. He points out that those " free upgrades" are rarely " free." Before looking at how " free" they really are, let’s look at how the builder or real estate company profits from such a deal.

A lot of mortgages are sold to either Fannie Mae or Freddie Mac, government-chartered public corporations that buy mortgages so lenders will have money to loan other buyers. When lenders sell loans, they make a slight profit. More important is the servicing contract, which in most cases is kept by the company that makes the loan. Sometimes the company will sell the servicing contract as well. That is why you might get a letter saying your loan has been sold and you will start making your monthly payments to a new company.

Regardless of who actually owns the loan, the payments are made to the service company, which you can think of as the " lender of record." The lender of record handles all the paperwork. He or she also deals with late payments and, if necessary, takes a delinquent mortgage into foreclosure. The lender of record passes the payments on to the loan’s actual owner. " The lender of record will get a service relief premium," Duncan explains. " Let’s say your mortgage is for 6 percent. The lender will remit 5.75 percent of the interest to the investor, and will keep the other 25 basis points as a servicing fee."

Now that you know how the builder or real estate company benefits by offering you its own loan, how can you know if it is really a good deal? " You need something to compare it to," Duncan explains. " You will have to shop around. If the builder offers incentives, you need to price what they would cost if you were to attain your own financing. Let’s say the builder is offering you a 6.25 percent mortgage, but he’s including upgrades that would cost you $1,000, or even $3,000. Now let’s say that another lender is offering you the same basic loan for 6 percent. If you take that loan, however, you will either have to pay for the upgrades or not get them at all.

" If you are really going to do the sharp pencil work on this," Duncan adds, " it is a matter of comparing the price of the upgrades to the difference in the price of the loan. How much more would the payment be if you did it through the builder, and how long would it take those extra payments to add up to the cost of the upgrades? Of course, you also would be paying the higher rate for the life of the loan, which could last longer than the plush carpet and/or refrigerator you received as an upgrade. Money is not the only consideration, however. You have to ask yourself how much is it worth to deal with just one company for both the home and the loan? And how much do you really want the upgrades?

As Duncan points out, " This is a sharp pencil exercise. You have to be willing to do the work." The comparison-shopping may be well worth it, however. People say you can’t compare apples to oranges. When you compare the cost of the builder’s home loan to the cost of getting your own loan and upgrading the home on your own, you could end up saving money. There might even be enough to let you plant your own apple and orange trees—just so you can find out for yourself if they can be compared.