How to get the best mortgage rates in the country? Buy new

As mortgage rates fall to near historic lows, some homebuilders are offering even lower interest rates in an effort to lure buyers during the slow spring selling season.

The latest sales promotion: Lennar Corp. is offering a fixed 3.625% rate over the life of a 30-year fixed rate mortgage. The deal is besting average rates that have fallen below 5% nationwide, but it comes as other builders are reporting mixed results from similar incentives.

Hovnanian Enterprises Inc.'s recent offer of a 3.99% rate sparked "underwhelming" interest from homebuyers, says Dan Klinger, president of the builder's mortgage operation. "It wasn't like we needed crowd control," Klinger says.

Earlier this year, luxury builder Toll Brothers Inc. was offering a 3.99% interest rate in many of its developments nationwide, but today that rate is no longer available nationally. Toll executives said that the promotion boosted traffic to its Web site, but the low rate alone hasn't been enough to break weak consumer confidence that is still weighing on the market.

Bargain mortgage rates are the latest sales strategy from builders struggling to sell homes. Mounting unemployment continues dogging the sector, because people without jobs, or those afraid of losing one, are unlikely to purchase, no matter how low the rate.

Since the downturn began, builders have tried everything from free tropical vacations to subsidized closing costs in order to move inventory. They then cut costs and even offered layaway plans for down payments.


For homebuyers, the low mortgage rates from the builders represent significant savings. But be wary of the fine print: Lennar is offering the 30-year rate "on select homes," and the loan amount cannot exceed $417,000. The minimum credit score is 700, which is a relatively high score in the current environment. In addition, it could be hard for buyers to come up with the minimum 10% down payment that Lennar requires to qualify for the 3.625% rate.

The builders' low rates may help first-time homebuyers, "but it's not going to goose the trade-up market," says Thomas Lawler, a housing economist. "That's because most trade-up buyers use the equity from their previous home for a down payment, and that equity often doesn't exist anymore."

KB Home is one builder that isn't chasing buyers with low mortgage rates, for now. Instead, the Los Angeles-based builder is focusing on offering smaller houses that are competitively priced with foreclosed houses. The strategy seems to be helping KB, which reported last month that its sales improved more than some analysts expected.

While some builders acknowledge that price cuts are the most effective way to move inventory, such cuts could cause buyers who have already bought a house at a higher price to walk away from their deposits.

It can be costly for builders to offer the low rates because the companies typically pay mortgage investors cash upfront in exchange for the low interest-rate loans. Federal regulations limit how much the builders can contribute to buy down mortgage rates. Currently, if a homebuyer puts down 5% or less, the builder is limited to incentives worth 3% of the sales price, Klinger says. For down payments of 10%, the limit climbs to 6%.


*This article was written by Michael Corkery and Dawn Wotapka of The Wall Street Journal.