Toll 3.99% Mortgages – What’s the Catch?

 Toll Brothers (TOL) announced today that they are offering 3.99% fixed mortgage rates for 30 year mortgages for homebuyers that meet certain provisions.  A 3.99% interest rate is the lowest I’ve come across, as national mortgage rates briefly dipped below 5.0% last week, before dipping up again this week.  Rates are widely anticipated to continue lower given the recent actions by the Fed and Treasury. 

For homeowners looking forward to taking advantage of the Toll Brothers deal, they must meet the following criteria:

• Homebuyer FICO must be 720 or higher (Click Here
  for official originator, info on FICO scores)
• A down payment of 20% is required
• This applies to conforming loans which are $417,000 or less for no points

To illustrate how beneficial this mortgage deal is to prospective buyers, let’s say you’re buying a new Toll Brothers house and you need to borrow the maximum $417,000 (it should come as no surprise that Toll houses are typically 500K and up in the markets they serve).  If you were able to strike a great deal on a house today at 5.0%, which is slightly less than the national average, you’d incur the following mortgage payments:

$417K @ 5.0% =

$2242 monthly payment
$390K in interest paid over 30 years
$807K total paid over 30 years

 $417K @ 3.99% =

 $1992 monthly payment
$300K in interest paid over 30 years
$717K total paid over 30 years

This translates into monthly savings of $250/month or $3000/year, excluding tax benefits (early in the mortgage most of the payment is interest due to amortization, of which the interest piece is tax deductible) and the additional mortgage inclusions like insurance, real estate taxes, etc.  While I showed the total amount paid over 30 years, don’t focus too much on that since we’re talking present day dollars here and I don’t mean to overhype the importance of total savings in future dollars.  At 3.99% mortgage interest rates that you can write off (perhaps now a 3% effective rate), this is surely lower than your discount/investment rate.  In that context, these future dollars are meaningless since you’d actually earn more than these seemingly large numbers in a high yield account or possibly, the stock market.

These are provisions that obviously weren’t adhered to during the heyday of the past decade, but perhaps with these rather standard (by historical measures) provisions now enforced, Toll can gain some traction in unloading some inventory in the high end home market.

Some Considerations and Predictions:

Buyer’s remorse:  Remember all those people that went out and bought a car during the summer because the manufacturer was offering all the gas you could buy for $2 when gas prices were at $4?  Now, gas prices are below $2, so the whole notion of saving money on gas was in retrospect, a poorly timed bet.  If interest rates continue to plummet and people rush out to buy a new Toll Brothers house to get this deal (while perhaps overextending themselves just to get into a luxury home), it will be really frustrating to see 4.25% rates as a national average whereby buyers had the time and opportunity to buy any house, new or used, from any builder, on their own timeline and comfort level, for a mere .25% over this rushed decision.

Free Market Competition and no good idea goes unnoticed:  If other homebuilders start to see some action in the luxury market and Toll is taking market share while their inventory sits idle, what’s to keep them from following suit?  Perhaps this could turn into the next in one-upmanship that we saw with US automobile financing – massive incentives, zero interest, etc.  I’m not calling for zero interest on 30 year mortgages, but perhaps you end up seeing multiple builders offering the same rate within the next 6 months.

Reader Followup:

I’d like to hear back from any readers who are considering taking Toll up on this deal.  Are the terms and conditions as initially indicated?  Were you able to land the deal?  Any strings attached? 

Tagged as: Economy, Mortgage Rates, Real Estate