A top homebuilder executive breaks down the secrets to getting a 4.8% mortgage in an era of 8% rates
- High mortgage rates have slowed down the housing market, but homebuilders are thriving.
- That’s because they can offer financial incentives that shave thousands off the cost of a new home.
- Tawn Kelley walks Insider through the do’s and don’ts of homebuilder mortgage incentives.
Rising interest rates have slammed the brakes on America’s housing market, with September home sales down 15.4% year on year, according to the National Association of Realtors.
According to the Census Bureau, annual sales in one segment of the housing market are actually up 33.9% from last September. According to the National Association of Realtors, newly built homes now account for nearly one-third of all homes listed, a record high.
The success of homebuilders is based in part on their internal mortgage divisions. They can offer yesterday’s mortgage rates because they control the financing, saving customers tens of thousands of dollars and moving inventory in the process.
According to Tawn Kelley, president of financial services at homebuilder Taylor Morrison, financing is an important piece of the home-selling puzzle.”Finance sells homes, and a house doesn’t become a home unless we have the ability to get that customer to the closing table, and they can qualify and confidently make their mortgage payments,” Kelley went on to say.
Kelley has worked in the mortgage industry for 35 years, founding her own successful mortgage company in 2009, which was acquired by Taylor Morrison, the sixth largest public homebuilder. In her current position, she oversees the company’s financial services division, which includes everything from mortgages to title insurance and homeowners insurance.
Taylor Morrison was able to assist customers in lowering their rates from 8% to 4.875%, resulting in a one-third reduction in total monthly payment.
However, as with everything in homebuying, the process can be complicated because there are various financing options, and they each work differently depending on factors such as the amount of money put down, the homebuilder and mortgage company they’re working with, and whether they’re buying a home that’s already been built versus a plan and a plot of dirt.
Kelley walked Insider through the dos and don’ts of using these financial incentives in order to help home buyers better understand their options.
Consider your home builder’s captive mortgage arm.
Homebuilders can take advantage of a variety of financial incentives. The most common is the rate buydown, in which a mortgage provider purchases some of the transaction’s interest. Permanent rate buydowns, in which the provider pays up to 1.5% of the mortgage’s interest rate upfront for the entire 30-year term of the mortgage, are available, as are temporary rate buydowns. A homebuilder could buy 2% of the interest in the first year and 1% in the second year, or 3% in the first year, 2% in the second year, and 1% in the third year.
Then there are forward commitments, which allow a homebuilder to pay down more of the loan by prepaying interest rates. These are large interest payments made by a homebuilder prior to the sale of a home, which eventually expire. Taylor Morrison is able to bring some customers down to a 4.875% interest rate by applying these forward commitments to mortgages on homes that will sell soon.
For mortgages on unfinished homes, homebuilders can offer mortgage locks, which allow buyers to lock in an interest rate when they apply for the home rather than when they close. There are also float downs, which allow buyers who lock in a mortgage rate to reduce their interest rates if mortgage rates fall during the term of the mortgage lock.
Finally, mortgage lenders can provide closing-cost assistance, which is money given to a customer to help pay for the various costs associated with closing a house. While they have no direct effect on interest rates, they can provide significant savings to buyers and allow them to apply more of their cash on hand to a down payment or home equity.
Don’t think of their mortgage division as a gimmick.
Obtaining an interest rate of less than 5% at this time may appear to be too good to be true, but homebuilders are acting in their own self-interest when they offer these deals.
The primary reason for this is that these captive mortgage arms are not what makes them money. According to Devyn Bachman, senior vice president of research and operations at homebuilding and single-family rental consultancy John Burns, public homebuilders had a high margin of 25.3% as of the second quarter of 2023. Of course, they profit from mortgages, but home sales are the main product and can subsidize mortgage costs. Their primary goal is to assist you in purchasing a home on time and without hiccups, which is why they can offer deals that others cannot.
Take their word for it.
You should, however, do your homework. A customer is never required to use their builder’s captive mortgage company, and they should always ask their mortgage reps about the mortgage’s good, bad, and ugly points.
“No question is too silly, and no question should not be able to be answered by the professional that they’re talking with,” she said.
While she believes Taylor Morrison’s in-house mortgage team will provide the best deal for their customers, it’s always worth looking to see if there’s a better one.
In the end, she claims that more than 85% of customers opt for the company’s captive mortgage arm.
Do request any and all incentives that may be available.
Incentives can be combined to get the best deal possible.
Homebuilders are not permitted to cover more than 6% of the closing costs on a deal with a 10% down payment, or 3% on a deal with a 5% down payment. However, because forward commitments are considered marketing spend, they can help home buyers get around these rules. To put it another way, forward commitments can be combined with a temporary rate buydown to increase savings. In addition, the homebuilder may cover traditional closing costs to make it easier to purchase a home.
All of this can add up to significant savings. Don’t forget to inquire about any and all possible deals.
You should not believe that you can use any offer on any home.
Because they frequently expire within 60 days, forward commitments are only available for already built “spec” homes. As a result, homes purchased before they are built, allowing customers to customize finishes, cannot use forward commitments, but can use rate-buydowns and closing cost assistance.
There are some special offers available only to these types of buyers. Taylor Morrison offers an extended mortgage lock and a one-time free float down to take advantage of potentially lower interest rates. Each home has its own solution, and it’s critical to understand what incentives can and cannot be used.
Think about your upgrade options.
Customers can afford a more expensive house because forward commitments are applied before they buy a home. Using the previous example, if someone had budgeted for a $3,700 monthly payment, expecting to be able to buy a $500,000 mortgage at 4%, they could actually be underwritten for a $770,000 mortgage. As home prices remain near or at all-time highs, a much more expensive home is now within reach.
Remember that interest rates can rise.
If a customer receives a temporary rate reduction, it is critical that they budget so that they can afford the mortgage when the rate rises. Customers who do not comply may face the same problems that plagued homebuyers who used adjustable-rate mortgages during the 2008 housing crisis. Their mortgage cost increased one day, and they were no longer able to pay.
According to Kurt Carlton, president and co-founder of New Western, increasing mortgage payments could cause market distress in the event of a recession that results in job loss.
Alex is an Insider reporter who covers real estate, the tensions that exist between real estate investors, tenants, and homeowners, and how technology and material conditions are changing the buildings we inhabit.
He’s curious about how real estate technology is reimagining what privacy looks like, how companies are building more affordable and sustainable buildings, how remote work will change the office world and our relationships with our employers, and shifting demographic patterns.
He’s previously written about the real reasons Zillow Offers lost so much money on homes during a historic bull market, the historic amount of money investors are pouring into the housing market and why they may be squeezing out ordinary homebuyers, how student loan forgiveness could jumpstart the housing market, how Better CEO Vishal Garg went from a celebrated startup CEO to an avatar for bad bosses everywhere, and a new cryptocurrency that’s briskly growing in popularity.
He previously held positions at Bridgewater Associates and Peloton. He earned a bachelor’s degree in English from Boston College and a master’s degree in journalism from Columbia University’s Graduate School of Journalism. He is also the Insider Union’s secretary.
