A home builder is offering the following incentives in an advertisement found in the Edmonton Journal:
- 3.95% 3-year fixed mortgage
- No payments until May 2008
- sales price of $519900
- 10% down, 40 year amortization
- compared to a rate of 6.05%.
What happens if we lower the price and reduce the amortization to 30 years?
- sales price of $482,583 (original price - incentive value)
- same $52,00 down payment
- 30 year amortization
- Rate of 6.05%.
Why use incentives then? With prices being arbitrarily high the psychological effect of incentives valued at $37,317 is greater than a price decrease. On paper the difference between $519,900 and $482,583 does not get as much attention. Also the incentive may cost the builder less than the estimated value in the ad.
*using TD's mortgage calculator.