Jump the Interest Rate Hurdle

Rate buy-downs offer a tactic for new construction purchases

As mortgage interest rates tick up ever so slowly toward the high 7% range, many home buyers are looking for a way to move into their next home without breaking the bank.

Home builders, on the other hand, have another tool on their belt that can help: an interest rate buy-down.  It comes in the form of a builder credit and is applied directly to the buyers’ mortgage to help “buy down” the interest rate over time.  It could lower the buyers’ interest rate for a year, two years, or even spread out over the life of the loan.  It’s often significant, and can amount to hundreds of dollars per month in savings.  Or those funds could be applied other places instead, like an upgraded appliance package, lusher landscaping, or zeroing out buyer closing costs.

For homebuilders, it means a hefty sacrifice on the backend of their finances; depending on the home’s sale price, it could mean offering a $50,000 incentive on a single house.  But compared to a basic price drop, there are advantages for builders operating this way.  It means they can keep the final sale prices of their houses steady, which benefits their existing customers in the neighborhood and saves builders from enacting rebound price increases in their next phase of construction.  If and when interest rates fall, builders can wind down their incentive programs and get back to full earnings.

And while high-volume builders often have the best financial leverage to work with, any home seller can strategize to offer a rate buy-down.  Experimenting on a basic mortgage calculator can help determine the right buy-down to offer on a given listing, or talk to your agent to see what sort of incentives are popular.

Like any real estate trick, there is a word of caution.  Some sellers may increase their list price to help offset the cost of a rate buy down.  So how do buyers know if they’re paying too much?  The new trick is still subject to the same old story: ask your Realtor to run a comparable market analysis, and make your offer contingent on appraisal. ✅