Summary: This article discusses the concept of mortgage rate buydowns, emphasizing their potential benefits compared to a marginal price reduction. It explains that a mortgage rate buydown involves paying extra upfront to lower the interest rate on a mortgage, resulting in reduced monthly payments. The article compares the savings from a rate buydown to a price decrease and highlights the advantages of new construction homes, for which builders may offer rate buydowns to attract buyers. The article concludes that these buydowns, often funded by builders, can significantly reduce payments and enhance housing affordability, making them a valuable incentive for buyers.
Mortgage Rate Buydowns from New Home Builders
There are a lot of people out there hoping for a “crash” in house prices. After all, the memory of 2008’s plunging home prices is relatively fresh in our minds. What amazing deals we found! However, with inventory still low compared to pre-pandemic levels, the chances of a “crash” in the housing market prices are negligible.
But did you know that beyond a price reduction, a mortgage rate buydown offers a better deal? With mortgage rates in the 8% range, a lower interest rate saves homebuyers more money by reducing their monthly payments. How much more can it save you, and where can borrowers get this deal? We’ll answer these questions below.
Mortgage Rate Buydowns: Explained
If you’re a first-time buyer or new to the real estate world, then you may be wondering what a buydown is. In the simplest terms, a mortgage rate buydown reduces the interest rate applied to a mortgage, reducing monthly payments. This occurs when the discount points are paid toward the mortgage upfront. This is a one-time fee.
So, if Sally buys a house that costs $350,000 at an 8% interest rate and puts $50k down, she can expect to pay $2,639 monthly after adding expected taxes and fees. This cost breakdown includes a generic property tax amount of $2,375 yearly, home insurance of $1,155 per year, and private mortgage insurance of $138 monthly.
However, if she can pay down the 8% rate to 1.5%, reducing the 30-year mortgage rate to 6.5%, her monthly payment would be $2,334 after taxes and fees.
Applying these discount points saves Sally $305 monthly.
Mortgage Rate Buydowns vs. Price Decreases
So, what if Sally decided to negotiate a price drop instead? Let’s say she gets the house down to $330,000. Not a bad savings at $20k, but here’s how it shakes out:
After paying a 50k down payment and assuming the same property tax and PMI, Sally ends up with a monthly payment of $2,407.
A $20k price reduction saves Sally $232 monthly.
A $10k price reduction under the same condition saves her even less — just $81 per month.
- Hot Take: Don’t like PMI? Nobody really does. Talk to your lender about getting rid of this pesky payment. Paying beyond 20% of the home purchase value usually does the trick. Then you’ll save even more.
How can you get a mortgage buydown?
There are a couple of ways to get a rate buydown to lower your mortgage payment.
- First, you can negotiate with your mortgage lender. Throw in money beyond your down payment to pay down some mortgage percentage points before your mortgage loan is finalized.
- Alternatively, you can buy a new construction home and take advantage of builder incentives, which include rate buydowns with their preferred lender. These temporary buydown deals are giving new construction homes an edge over resale homes, as builders seek more creative ways to offer deals to buyers.
Note: This article refers to standard buydowns in which the monthly payment in the amortization schedule is the same throughout the 30-year period. Speak with your lender if you’re interested in something different like a 2-1 buydown, which offers a lower interest rate temporarily, amping up to a higher rate the second year, and then kicking in the maximum interest rate in the third year.
How much can a mortgage rate buydown save you?
To answer this question, we turn to the experts. We’re talking about John Burns, who answered this question not too long ago in the Barron’s Live Podcast. For reference, here is the complete transcript.
John Burns: “…If a builder bought down, took about 6% of the mortgage amount and paid that upfront in fees, they can buy down the interest rate by a point and a half. What that does is, that lowers the payment by 16%. So, for a cost of 6%, I can lower your payment by 16%. Why would I drop the price? That would just lower your payment by 6%. So, they’re using this anomaly in the mortgage market to provide people with a great 30-year fixed rate mortgage for really cheap, to keep them in the market.”
Rate buydowns with new construction are so useful that they can reduce your payment significantly more than a lower price. More than a price reduction or other upgrades, reducing a higher interest rate is one of the biggest benefits of investing in a new home sale.
Who pays for a new construction rate buydown? The buyer or the builder?
John Burns answers this: “It’s coming straight out of [the builder’s] profit margins. But remember, they bought the land, most of it three or four years ago, when they were anticipating selling the home for say $500,000, and now it’s worth $700,000. So, they have a lot of profit built up and so, they’re giving some of it back to the home buyer.”
Thank you, John Burns!
Bonus: New Construction Homes Rarely Need Repairs
On top of saving on standard market rates, brand new homes rarely, or if at all, need any repairs during the first year, and even the following years. The HVAC, roof, plumbing, electric, and land grading are all brand new and done up to modern standards. Americans looking for deals in a high-interest home market can find savings not only with mortgage company rate buydowns but the absence of big repairs the first few years of homeownership.
Mortgage Rate Buydowns: The Best Builder Incentive
With housing affordability being a top concern for many, reducing the cost of borrowing during the entire life of the loan offers more cost savings than a price reduction.
If you want to get a rate buy down with a new construction home, speak with one of our real estate agents today. We are experts in new construction homes and have been in the business for over 20 years and can help you navigate any market- including this one!
