Homebuilders nix rate buydowns after buyers’ tepid response

Homebuilders are getting rid of an incentive that allows buyers to reduce the interest rate on their mortgages, following feedback from the buyers that they would rather have other perks.

A builder or mortgage originator executes a rate buydown by paying the lender up front to charge a buyer a lower interest rate for the first year or two. The resulting rate is usually a percentage point lower than the original rate, and is meant to entice homebuyers concerned about increasing interest rates.

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But homebuilders, such as Scottsdale, Ariz.-based Meritage Homes, have discontinued rate buydowns after buyers gave them a ho-hum response, the Wall Street Journal reported. Meritage tried the scheme in August and September, but found that buyers prefer perks such as upgrades to home interiors, according to the newspaper.

“We’ve kind of stopped putting those [rate buydowns] out there,” Meritage CEO Steve Hilton said on a conference call yesterday, according to the Journal. “The typical incentives now are what we’ve always been using: Money to use toward upgrades and options.”

The lukewarm response to rate buydowns is likely a sign that buyers aren’t as anxious about interest rates as they were earlier in the year, when rates shot up by about one percent between May and September, according to the Journal. Rates have since rebounded slightly, to about 4.28 percent, and remain at historical lows. [WSJ]Hiten Samtani