| One-Stop
Shopping – Part 3
You
will remember that last week I said that the reason
the homebuilders are so eager to give you money
is that they are not really giving away their money.
They are probably giving you back your own money.
Here’s
the way that works. When you read the paper, you’d
think that there was just one rate, like 6% for
a no-point loan. In fact, every lender offers a
dozen different rate-versus-fee alternatives. If
the rate is high than “market,” the lender will
actually give the broker or loan officer a rebate.
For example, if the rate for your loan is 6.25%
in a 6% market, the ultimate lender will give the
builder’s lending department a 1 point rebate, $3,000
on a $300,000 loan.
So
when they promise you a $3,000 rebate, it’s because
when they quote you a rate, it is with the presumption
that they will be getting a $3,000 rebate from the
lender and then passing it on to you. If you think
that this still sounds OK, let me remind you that
because you are paying an interest rate that is
.25% higher than market, you will pay an additional
$9,600 in interest over the first ten years. Wow!
You pay $9,600 and you get $3,000 back! What a deal!
When
some people hear 6.25%, trusting the lender and
knowing that rates are “in the 6% range,” will not
check further. But the builder knows that anyone
who shops more shrewdly will quickly find out that
there are better deals out there. Thus the loan
officer you talk with will do everything s/he can
to avoid being pinned down as to what the price
is until it is too late for you to go elsewhere.
There
are other variations but the mechanism is essentially
the same. You can be sure that they are not trying
to do you a favor, they are not trying to give you
a deal, and they are not really making an attractive
offer to you. They want to coerce you into doing
something that you would not normally do. They use
the incentive to control you.
I
try to compare this with the automobile industry
and the financing incentives they offer to car buyers.
We know that financing and the sale are inexorably
intertwined, but in this case, Chevrolet and GMAC
are the same company and they can work together
to sell a car. The sales division is paying the
financing division. With the builders, it’s the
other way around! The lender is rebating (kicking
back) money to the builder.
There
also is a big difference in the interest involved.
In a 48 month $20,000 car loan at 5% interest, the
total interest over the life of the loan would be
only $2,100. In the case of the mortgage the interest
is much more than $2,100. On a 30-year $200,000
loan at 5%, the total interest is $186,500.
What
should you do? When you visit a tract you are interested
in, inquire about these incentives right up front.
If you decide to buy there, tell them you want the
incentive anyway, but without any strings attached.
You can make up a story about a competing tract
that doesn’t do this.
In
a hot market, they may sell the house to the next
buyer in line, but in a normal market, it’s hard
for me to believe that they would rather not sell
you the house if you don’t go along with their phony-baloney
financing program. Selling homes is their business,
not giving away money one financing.
Philosophically,
I agree that a builder ought to be able to make
sure that buyers are qualified, and if they want
to have standby financing available incase a borrower
ends up not having his own loan, that’s OK too.
But coercing customers is not ethical and I believe
it ought to be illegal.
Now
obviously, this is exactly what the State and Federal
laws are trying to prevent but no one in the legal
system seems to want to tackle this problem. You
can also write your Congressman, Senator, and State
Representatives and ask them to fix this.
I
would really enjoy feedback on this one from those
who have found themselves in this situation.
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