Toll Brothers (NYSE: TOL) may have a home buyer’s incentive above and beyond what other deals you have seen.  We have seen on multiple sources that the homebuilder is using a 3.99% mortgage rate fixed for 30-years to entice people to purchase homes.

Before you go rush over there, it appears that there are caveats.  There are probably many more than what we found.

This is a full point under thepredominant.  So it comes as no shock that a borrower needs a 720+ credit score AND a 20% down payment. They can’t haveprivate mortgage insurance which borrowers have always resented.

These are also the conforming type of mortgage loans which are$417,000.00 and under, and it looks like this rate carries no points.

Toll Brothers has housing all down the Eastern Seaboard, as well as inTexas, Nevada, California.  When the company gave results inDecember, it gave an average selling price of signed contracts as$495,000, down from $579,000 in the prior quarter.

So just assume it is a $400,000.00 house for argument’s sake.Bankrate.com lists 5.20% as the base rate for a 30-year fixed ratemortgage.  The average mortgage under the same terms of no pointsand 20% down (so a $320,000.00 mortgage) shows the following beforeadding things such as taxes, escrow and insurance:

• At 5.20%, a $320,000 mortgage would cost roughly $1,757.15 per month.
• At 3.99%, a $320,000 mortgage would cost roughly $1,525.88 per month.

You can see that a difference of morethan $230.00 per month on a $400,000.00 home, or a $320,000.00mortgage, would cost.  We pulled the $400,000.00 for an ease ofcalculation rather than a max-out on the conforming limits by thenincluding the total mortgage rather than the purchase price of thehouse.

It takes many months of $230+ savings to come close to that $80,000.00theoretical down payment.  But that is the new world of borrowing andlending.  And it is not likely to change in the near-future.

Regardless of how this goes, we still have one demand to Toll and other homebuilders: PLEASE DO NOT BUILD ANY MORE HOUSES…. SUPPLY IS THROUGH THE ROOF, LITERALLY!!!!

Before you go calling your own mortgage lender to see if you can refinance anywhere close to that 3.99% rate, keep in mind that this is for new homes being sold by the builder.  Your mortgage broker will likely say something to the tune of "Yeah sure! With 20% down and a buy down of 10 points.  If you were able to get approved for the loan."

Toll Brothers is likely having to pay out the difference to the lender in some form or fashion to make up the difference.  It might not make sense on the surface, but it is a creative way of trying to pare down housing inventory if you are a homebuilder.

Jon C. Ogg
January 21, 2009

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