The Surprising Perk of Buying a New Home: Lower Mortgage Rates (Kind Of)
As housing markets slowed over the last two years, homebuilders have gotten creative to move inventory.
“Many builders are offering to buy down mortgage rates instead of lowering the purchase price,” explained Jon Brooks, housing analyst with Momentum Realty. It lowers the monthly payment, making the home more affordable from a monthly budget standpoint.
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But just how valuable is that perk for homebuyers? Buyers often don’t realize the hidden costs and downsides to builder incentives like mortgage rate buydowns. Find out more below.
Already Baked Into the Price
Builders pay lenders a one-time fee to buy down the mortgage rate at closing. In many cases, the builder has baked in the cost of the rate buydown and just raised the sales price to cover it.
“If the builder sets the sale price higher to facilitate the buy down, the buyer is essentially funding the buy down, therefore negating any benefit,” said Sain Rhodes, housing expert with Clever Offers.
Ultimately, a lower purchase price probably helps you more than a rate buydown.
Required Lender
Often, homebuilders require buyers to use their partnered lender to get the lower rate incentive.
The problem: often the partner lender charges higher closing fees or a higher baseline interest rate.
Always get at least one other quote from another mortgage lender and compare the total cost of financing. Even if the partnered lender charges less overall (factoring in the buydown), the total savings is often less than you could negotiate down the price.
Temporary Lower Rate
Realtor Matt Brown of Matt Brown Real Estate pointed out that homebuilders usually buy down the mortgage rate temporarily, not for the life of the loan.
“The most popular 2-1 buydown structure reduces the rate for the first two years and then it increases to the full rate.”
So yes, you might save a little money on interest in the first year or two. Then your payment jumps back up to what it would have been anyway, often setting homeowners up for a payment shock.
Lock-In Effect
Even when builders offer a permanent rate buydown, it can lock you into the house.
“If the owner needs to move within the first five years, they lose that below-market mortgage rate while still facing the same costs of buying and selling a home,” adds Brooks. “And when they go to sell, they often have to compete against later-built phases of the same community, where builders are offering lower prices, new incentives or both.”
Housing Market Manipulation
Why do homebuilders offer to buy down the interest rate for buyers, rather than simply offering them a discounted price?
“Incentives like rate buydowns discreetly hold prices up,” explained Brown. It keeps the comps (comparable sales) high for the development community as a whole. “That's a real competitive distortion, as headline new home prices look stickier than the real economics.”
If you’re considering buying a newly-constructed home, negotiate on price and upgrades in addition to rate buydowns. Homebuilders offering incentives have already tipped their hand that they’re motivated to sell — play hardball if you want to come away with a true bargain rather than the appearance of one.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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