Low-Interest Loan Offers Back in Style : Builders Stimulate Home Sales With Finance Packages

The recent rise in mortgage rates is leading a growing number of home builders to once again offer special, low-interest loans in an effort to keep would-be home buyers streaming through their sales offices.

Although the discount programs aren’t nearly as widespread as they were in the 16% mortgage-rate days of the early 1980s, they’ve recently become easier to find because fixed rates have jumped nearly two full percentage points over the past three months.

More special financing programs could be introduced if rates continue climbing, or if the sales pace slows.

“We’ve definitely seen an increase in special financing programs over the past several months,” said Michael Carliner, an official of the National Assn. of Home Builders in Washington, D. C., in a telephone interview.

Most builders try to avoid discount loan plans because they trim thousands of dollars off bottom-line profits. They particularly disdain so-called “buy-down” programs in which the builder pays a bank a large fee to induce the lender to offer low-interest loans to home buyers.

Rising Interest Rates

But rising interest rates, combined with heavy competition and a limited supply of buyers, have left many builders little choice but to offer special financing packages.

So far, most developers offering cut-rate loans are involved in projects that cater to first-time buyers, the market segment that suffers most when interest rates rise.

Special financing programs at condominium developments are already widespread, in part because the condo market in many areas is soft.

Buyers who can make a mere 5% down-payment at U.S. Housing’s Key Largo condo development in Hollywood can qualify for an 8 1/2% fixed-rate mortgage; the Mesa Business Center in Costa Mesa is luring customers to its office-condo project by advertising 9 1/2% rates.

Luxurious Condos

Even the developer of the swank Park Wellington project in West Los Angeles--where condos sell for as much as $350,000, and residents can order a limousine or make theater reservations simply by calling the building’s concierge--is offering 30-year loans at 9%, about 1 1/2 points below the rest of the market.

“Our buyers are affluent, but I’ve yet to see anyone walk in the door who wasn’t concerned about interest rates,” said Ellen Monkarsh, Park Wellington’s sales manager.

Builders with several different projects are offering the loans only in spots where they’re needed.

North Hollywood-based D & S Co. recently began offering discount financing on its $50,000 condos in Reno, in part because the rate run-up has made it impossible for many first-time buyers to qualify for a conventional loan.

But D & S didn’t need any gimmicks to lure buyers to the recent grand opening of its Stonecreek development in Calabasas, where two-bedroom homes start at $164,900.

Using Financing Sparingly

“We had 1,000 people on the waiting list for 84 homes,” said Pat Logan, the company’s vice president of marketing and sales. “It sold out in two days.”

Tustin-based Gfeller Development Co. is also using special financing packages sparingly. It isn’t offering low-rate loans to buyers at its Somerset development in Westminster because escrows will close on the last of the homes within the next few weeks and no drastic change in rates is expected soon.

But at Gfeller’s Montego project in Rancho San Clemente--where many escrows won’t close until the fall--the company has struck a deal with a lender guaranteeing that buyers won’t have to accept a rate higher than 10 7/8%.

“We’re not worried about where rates will be a few weeks from now, but we can’t say for certain where they’ll be toward the end of the year,” said Elliot Light, Gfeller’s vice president of sales. “It cost us several thousand dollars to guarantee the 10 7/8% rate, but we look at it as a cheap form of insurance against possible rate increases.”

Higher Advertising Budget

Others are trying to keep sales levels up without resorting to costly buy-down programs. West Los Angeles-based Weston Communities has raised its advertsing budget by about 15% since rates went up in April; it also steers moderate-income buyers toward low-rate loan programs offered by the state and certain cities.

“We’re doing OK now,” said Bob Jones, Weston’s vice president of marketing. “But if rates go up another point or so, we’ll have to seriously consider offering a buy-down program or some type of special adjustable-rate loan.

“We don’t like to do that, but it’s a cost of doing business.”