As an incentive for buying newly constructed homes, developers are likely to offer buyers a mortgage rate buydown to finish the deal. This action is similar to paying off a point upfront. However, it is the developer who is subsidizing part of the loan to lower the buyer’s monthly payments, and only for a limited number of years (instead of for the life of the loan).
The incentive helps buyers who may be very stretched during the initial 2 years.
Buyers should focus on the monthly payment amounts after the subsidies / buydown period have ended because that is the true full cost to the buyer each month.
| Year | Developer buydown rate | Your interest rate | Monthly payment on $500,000 30-yr/fixed mortgage |
| 1 | 1.0% | 3.5% | $2,245 |
| 2 | 0.5% | 4% | $2,387 |
| 3-30 | 0% – developer stops subsidizing | 4.5% | $2,534 |
The buydown rate could be negotiated higher and longer terms depending on how motivated the developers are with getting the deal completed. The above buydown example saves the buyer $3,468 in year 1, and $1,764 in year 2.
Remember the questions to ask yourself as the buyer:
- What is the total amount over the life of the loan?
- Could I afford the monthly payments after the buydown period ends?
- Since the developer is offering a mortgage buydown, would they be willing to lower the purchase price?
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