Dreaming of buying a home? You don’t have to let rates above 7% stop you from making that happen.
Homebuilders eager to close deals are offering discounts, especially temporary rate buydowns, to sweeten the pot. Nearly 19% of homebuilders offered buyer incentives in August, the most recent data available, according to Realtor.com. Additionally, 13.8% of all new-build listings specifically included rate buydowns.
“Builders might be more motivated sellers than someone who is selling their existing home because those sellers can always delist the home and try again next year when there’s more demand,” Realtor.com senior economist Jake Krimmel told CNBC Select.
If you can stomach a higher monthly payment once the temporary buydown ends, the incentive could make a new home more affordable for the first couple of years. CNBC Select explains which lenders offer builder-funded rate buydowns as well as the benefits and drawbacks of this plan.
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What is a rate buydown?
A rate buydown is when a buyer, seller, homebuilder or home loan lender provides a certain amount of money when the mortgage is signed so the buyer can have a lower rate, either for a portion of or the entire mortgage term.
In cases where the builder buys down a rate, it will most likely be a temporary buydown where the rate is lowered for one, two or three years before the borrower is charged the full rate as outlined in the loan underwriting.
Here’s how three common types of temporary rate buydowns work.
| Rate buydown | Structure |
|---|---|
| 1-0 | Rate effectively drops by a percentage point during the first year and reverts to original from the second year onward |
| 2-1 | Rate effectively drops by two percentage points during the first year, one percentage point the second year and reverts to original from the third year onward |
| 3-2-1 | Rate effectively drops by three percentage points during the first year, two percentage points during the second year, one percentage point during the third year and reverts to original from the fourth year onward |
Lenders that allow builders to pay for a rate buydown
If you are looking for a lender that will allow a builder to fund a rate buydown, companies like Guild Mortgage, DHI Mortgage and Rocket Mortgage all have options specifically for the builder to buy down a rate.
Guild Mortgage — available in every state except for New York — offers traditional temporary buydown options that can be funded by the homebuilder. Additionally, it offers several unique products that can be used in conjunction with a builder contribution, including StrongStart, which allows homebuyers to use the builder’s incentive to pay interest on their mortgage for up to five months.
Guild Mortgage
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Types of loans
Conventional, FHA, VA, USDA, Arrive Home, Zero Down, jumbo, renovation, refinancing, reverse mortgages, home equity loans
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Terms
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Minimum credit score
540 for FHA, VA and USDA loans; 600 for Zero Down; 620 for conventional loans, 680 for jumbo loans. Nontraditional credit options available
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Minimum down payment
0% for USDA, VA, Arrive Home™ or Zero Down; 1% for conventional loans, 3.5% for FHA loans
DHI Mortgage, the lending arm of homebuilding giant D.R. Horton, also offers temporary buydowns funded by builders. If you purchase a D.R. Horton-built home, financing through this lender may simplify the buydown process since the company purchasing the buydown will be directly involved in the underwriting.
DHI Mortgage Company
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Annual Percentage Rate (APR)
Apply online for personalized rates
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Types of loans
Conventional, fixed-rate, adjustable-rate, FHA loans, USDA loans, VA loans, jumbo loans, affordable housing loans
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Terms
30-year fixed rate and more.
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Credit needed
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Minimum down payment
5% for conventional, 3.5% for FHA and 0% for USDA and VA
Rocket Mortgage also provides options for temporary buydowns that can be funded by the seller. If you want the best customer service possible, Rocket Mortgage consistently ranks high on J.D. Power’s customer satisfaction surveys and has an A+ from the Better Business Bureau.
Rocket Mortgage
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages are available.
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Types of loans
Conventional loans, FHA loans, VA loans, Jumbo loans, low-down-payment mortgages
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Terms
10-, 15- and 30-year fixed-term conventional loans, 30-year VA and FHA loans, custom mortgages with fixed-rate terms from 8 to 29 years.
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Credit needed
620 for conventional loans
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Minimum down payment
0% for VA, 1% for RocketONE+, 3% for conventional, 3.5% for FHA, 10% to 15% for jumbo
Pros and cons of a builder rate buydown
Pros
- Lower initial payments
- You’ll spend less over the life of the loan
- If you can refinance to a lower rate before the end of the temporary buydown period, you may be able to avoid a high rate
Cons
- You’ll pay more each month after the buydown period ends
- There may be other incentives that could save you more money over the long run
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Why trust CNBC Select?
At CNBC Select, our mission is to deliver high-quality service journalism and comprehensive consumer advice to our readers, enabling them to make informed financial decisions. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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