Housing News

A 3.99% Rate? Sounds Like They're Kidding

Find out if this figure is true.

TBI Mortgage Company under its parent company Horsham, PA-based Toll Brothers Inc. has announced last week that it will be offering loans at only 3.99% interest to encourage buyers to build their dream houses amidst a property market slump. News has spread swiftly online and media companies picked up the announcement as a breather to the drought-ridden mortgage market. Even CNBC.com resident analyst Bob Pisani is glad about it.

There are enough reasons why TBI’s phone lines were suddenly bombarded by interested applicants until last Sunday – the last day of the offer. First, the Treasury has not yet achieved its goal of pushing down the 30-year fixed mortgage rate to 4.5 percent after a series of massive artificial mortgage demand. People have been speculating when this target rate will be finally called in by their lenders and so far, they’re holding their applications still. Second, market reaction is naturally quick when it comes to marketing tactics like this. Think of it as the classic two neighbors selling lemonade side by side. When one sees his competitor suddenly building a long line of customers, the quickest way to attract them back to his booth is to post a large sign bearing a slashed price for the same beverage.

But TBI’s product differentiation ends the similarity in the perfectly competitive market above. While the company publicizes affordability, there are certain reasons that it would reveal otherwise. To avail, borrowers need a credit score of at least 720. That alone disqualifies a lot of borrowers. A 20 percent downpayment is also needed that is fairly commensurate to the applicant’s financial status. The 3.99 percent offer is locked up for 270 days. That’s three quarters of easy financing with substantial savings for a $417,000 loan, the maximum mortgage that Fannie Mae and Freddie Mac can guarantee. However, just like any loans that begin with a lower rate, borrowers should brace themselves for the complete spin in their monthly payments when the rate expires and suddenly racks up to a much higher level. It’s still a dicey plan after all.

Furthermore, borrowers wouldn’t be allowed to have a private mortgage insurance (PMI) and this puts them at further risk once the rates expire. Recall too that national median home values have not waned up to now and there are still no signs of bottoming prices yet. Lastly, those who availed are limited to the homes that are built by TBI only. In other words, they have no option but to pay for the higher construction fees that the company will be charging in the 21 states that it is servicing. That’s too much for cracking a sweet (and sour) deal.

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