• High mortgage rates have slowed down the housing market, but homebuilders are thriving.
• That's because they can offer financial incentives that shave thousands off the cost of a new home.
• Tawn Kelley walks Insider through the do's and don'ts of homebuilder mortgage incentives.

Rising interest rates have slammed the breaks on America's housing market, with home sales down 15.4% year-over-year in September, according to the National Association of Realtors.

But one segment of the housing market is still humming along, with annual sales actually up 33.9% from last September, according to the Census Bureau. Newly built homes now make up nearly one-third of all homes listed, a record high, according to the National Association of Realtors.

Homebuilders' success lies in part in their internal mortgage divisions. By controlling the financing, they can offer yesterday's mortgage rates, saving customers tens of thousands of dollars and moving inventory in the process.

Tawn Kelley, president of financial services at homebuilder Taylor Morrison, told Insider that financing is an essential part of the home-selling puzzle.

"Finance sells homes, and a house doesn't become a home unless we have the ability to get that customer to the closing table, and they can qualify and confidently make their mortgage payments," said Kelley. 

Kelley has been in the mortgage industry for 35 years, founding her own successful mortgage company that was acquired in 2009 by Taylor Morrison, the sixth largest public homebuilder. In her current job, she runs the company's financial services operation, from mortgage to title insurance services and homeowners insurance.

Taylor Morrison has been able to help customers lower their rates from 8% to 4.875%, reducing the total monthly payment by a third.

However, as with everything in homebuying, the process can be complicated because there are a variety of financing options, and they each work differently depending on factors like the amount of money someone puts down, the homebuilder and mortgage company they're working with, and whether they're buying a home that's already been built versus a plan and a plot of dirt.

In an effort to help home shoppers better understand their options, Kelley walked Insider through the do's and don'ts of using these financial incentives.

Do consider the captive mortgage arm of your home builder

There is a range of financial incentives at homebuilders' disposal. The most common is the mortgage rate buydown, where a mortgage provider purchases some of the interest of the transaction. There are permanent rate buydowns, where the provider prepays up to 1.5% of the mortgage's interest rate upfront for the 30-year term of the mortgage, as well as temporary rate buydowns. A homebuilder could either purchase 2% of the interest in the first year and 1% in the second year, or they can purchase 3% in the first year, 2% in the second year, and 1% in the third year.

Then, there are forward commitments, another way to prepay interest rates that allows a homebuilder to pay down more of it. These are large tranches of interest that a homebuilder prepays before a home is sold, which eventually expire. The homebuilder can apply these forward commitments to mortgages on homes that will sell soon, and this is how Taylor Morrison is able to bring some customers down to a 4.875% interest rate. 

For mortgages on homes that haven't been built yet, homebuilders can offer mortgage locks, which allow purchasers to lock in an interest rate at the time they applied for the home instead of when they close. There are also float downs, which allow purchasers who lock in a mortgage price to reduce their interest rates if mortgage rates get smaller over the course of their mortgage lock.

Finally, mortgage providers can offer closing-cost assistance, where they give a customer some money to help pay for the assorted costs that come when someone is closing a house. While they don't directly affect interest rates, they can offer buyers large savings and allow them to apply more of their cash on hand to a down payment or home equity.

Don't assume their mortgage arm is a gimmick

Getting an interest rate under 5% at a time like this might seem too good to be true, but homebuilders are actually acting in their own self-interest when they offer these deals. 

The main reason is that these captive mortgage arms aren't what's making them money. Homebuilders make money by selling homes, and as of the second quarter of 2023, public homebuilders have had a high margin of 25.3%, according to Devyn Bachman, senior vice president of research & operations at homebuilding and single-family rental consultancy John Burns. They also make money from the mortgage, of course, but home sales are the main product and can subsidize the mortgage costs. Their main goal is to help you buy the house on time and without hiccups, which is why they're able to offer deals that others can't.

Don't take their word for it

Still, you should do your homework. A customer is never required to use their builders' captive mortgage company, and they should be sure to ask their mortgage reps about the good, the bad, and the ugly of the mortgage. 

"No question is too silly, and no question should not be able to be answered by the professional that they're talking with," Kelley said.

While she said that she believes Taylor Morrison's in-house mortgage team will offer their customers the best deal, it's always worth looking to see if there's a better one.

In the end, she said, more than 85% of customers end up choosing to use the company's captive mortgage arm.

Do ask for every incentive you could be offered

Incentives can be stacked together to get the best possible deal.

Homebuilders are not allowed to cover more than 6% of the closing cost on a deal with a 10% down payment, or 3% on a 5% down payment. But forward commitments can help home buyers get around these rules because they are considered marketing spend.

In other words,  forward commitments, which can get an interest rate as low as 4.875% from 8%, can be bundled with a temporary rate buydown to increase savings. On top of that, the homebuilder could also cover traditional closing costs to make it easier to get into a home. 

All of this can stack up to major savings. Don't forget to ask about every possible deal.

Don't think you can use any offer on any home

Forward commitments are only available for already built, "spec" homes because they often expire within 60 days. Therefore, homes that are purchased before they've been built, which allow customers to customize finishes, can't use forward commitments, though they can use rate-buydowns and closing cost assistance.

There are some incentives exclusively for these types of buyers. Taylor Morrison offers an extended lock on a mortgage and a one-time free float down to capture lower interest rates that could come along. Each home has its own solution, and it's important to know what incentives can and can't be applied.

Do consider your upgrade options

Forward commitments are applied before someone buys a home, which means that customers can afford a more expensive house. Using the example above, if someone had budgeted for a $3,700 a month payment, expecting to be able to buy a home that would require a $500,000 mortgage at 4%, they could actually be underwritten for a home that would require a $770,000 mortgage. As home prices remain near or at all-time highs, this puts a much more expensive home in reach.

Don't forget that the rates can go up 

If a customer is receiving a temporary rate buydown, it's important that they budget so that they can afford the mortgage when the rate goes up. Customers who don't could face the sort of issues that hurt homebuyers who used adjustable-rate mortgages during the 2008 housing crisis. One day, their mortgage cost went up and they were no longer able to pay. 

Kurt Carlton, president and co-founder of New Western, told Insider that in the case of a recession that causes job loss, these sorts of increasing mortgage payments could lead to some distress in the market.

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