Financing Your Production Home
Builders will often market the home based on a low initial payment. Builders will often market the home based on a low initial payment. Be cautious of the financing benefits because you may be taking on more financing risk than is appropriate. Some important points include:
- Financing incentives are buried in the price: Many production Builders add on 3-5% to the price of the home for the great financing. On a $200,000 house, that means you just paid $6,000-$10,000 to the Builder to give you that great rate, buydown, or low introductory rate. The real value of the house is 3-5% lower.
- Why is the payment so low for a new build? The large print giveth and the small print taketh away. Never shop for a home based on the payment. If the house costs $150,000 and the payment for the Builder's 30-year fixed mortgage is lower than if you bought an existing home at $150,000, it is most likely because you are paying extra for the financing.
- Risk of adding expenses to the mortgage if you are a short term Buyer: If the Builder added in 3% for financing to the price of the home, the benefits of the lower payment will be justified after 4-7 years. If you have to sell the house quickly, you may lose money because the true value of the your home on resale may not cover the over-payment you made for financing incentives.
- Benefit of long-term rate lock: This is one of the best benefits of Builder financing. They will lock in the interest rate during the entire construction process, which is usually around 270 days. If you are nervous about rising rates, then this feature will be hard to beat. Most lenders can lock in the rate but they will charge a premium for long-term locks.
- Shop to see if it's truly a benefit. Get a good-faith estimate from the Builder's lender. Ask how much they would drop the price of the home if you got financing on your own. Ask other lenders if they can compete if they are also using the same financing premium. Only then will you truly know if you are getting a good deal.
- Short term mortgages are used to decrease the initial payment. The low payment you see in the paper may change at the end of the year and adjust every year therafter. If you are going to live in the house for a short time then a short term adjustable mortgage may be appropriate. Short term mortgages can be risky, so make sure you get the mortgage that is appropriate for you because the payments can adjust upwards
