Quick answer: A builder rate buydown is money a homebuilder pays your mortgage lender at closing so the interest rate on your loan comes out lower. Builders across Dallas-Fort Worth use two versions of this, advertised almost identically. One lowers your rate for the life of the loan. The other lowers your payment for a short window at the start, then expires and leaves you with the full payment. Knowing which one is on the table is the whole conversation.
I'm Joni Freeman, PharmD, Principal Broker of JL Marsaw & Co, and I represent buyers on new construction across Frisco, Celina, Prosper, McKinney, and the rest of Dallas-Fort Worth.
The sign in the front yard advertises a rate. It does not tell you whether that rate is yours for good or yours for a little while, and both get marketed with the same enthusiasm. Buyers sign, move in, and get a letter two years later saying their payment is going up. Nothing improper happened. They never asked one question.
How does a builder rate buydown actually work?
A builder pays your lender a sum of money at closing, and in exchange the lender gives you a lower interest rate than you would have qualified for on your own.
Why builders do this instead of cutting the price explains the whole negotiation. A price cut shows up in the sales data that appraisers and agents work from, and becomes a comparable sale, a "comp," dragging down what the builder can charge for the rest of the phase. Texas does not put sale prices in the public record, but builders report to the MLS and to appraisers, so the effect lands anyway. A buydown moves the home without touching the price anyone will later cite.
The money is usually applied as discount points. A discount point is one percent of your loan amount, paid at closing, in exchange for a lower rate. Buying points is prepaying interest, and when the builder pays them, they are prepaying your interest out of a budget already built into the home.
Does the builder's lower rate last, or does it expire?
This is the most expensive thing a buyer can misunderstand.
A permanent buydown changes the interest rate written on your loan documents, and it stays changed as long as you hold the loan.
A temporary buydown does not change your loan rate at all. The loan is written at the full rate from day one. A pot of money is set aside at closing, and each month that account covers the difference between what you pay and what the loan requires. When it runs dry, you pay the full amount.
Temporary buydowns are advertised as a "2-1" or a "3-2-1," and here is where the vocabulary trips people. The industry uses "points" for two unrelated things. The first is the discount point above, a fee equal to one percent of your loan amount. The second has nothing to do with a fee. The digits in a "2-1" or "3-2-1" count percentage points of interest rate, how far the rate itself moves in year one and then year two, ending when the money runs out. Same word, two different jobs. If a sales representative uses the word without specifying, ask which one they mean.
Source: Fannie Mae Selling Guide, B2-1.4-04, Temporary Interest Rate Buydowns. Full citations at the end.
Who is actually paying for the buydown?
You are, indirectly, and so is the builder. It is not free money.
Every builder works from an incentive budget, a set amount per home they will give back to move it. That money is already priced into the home, so when it goes toward your rate it is not going anywhere else.
One question surfaces: what is the price of this home with the incentive, and what is the price without it? Ask it early, ask it plainly, and get the answer in writing.
Reading the gap between those two numbers takes judgment. The same gap means one thing on the last home in a section closing out and something very different on a to-be-built in a phase that just opened, and what you ask for next changes with it. That read is what I bring when I represent a buyer on a new build.
One more thing to plan for, and it is not a buydown issue. On a Texas new build your payment can rise in year two because of how the county values the property. I cover that in Why Does My House Payment Go Up in Year Two on a Texas New Build?.
Where do builders have room to move, and where do they not?
Less room than buyers expect on process, and more than they expect on everything else.
The builder's process is typically fixed, and that is where most people spend their leverage and get nowhere. Some production builders will not allow certain changes to design or finish out at all, regardless of who is asking. Pushing there spends goodwill on the one thing that will not move.
The incentive budget is different. Most of the time that money can be shifted between the rate buydown and closing costs, so if the rate is not where you actually need relief, say so and ask for it somewhere else. Upgrades are often treated as a separate bucket with far less flexibility, so do not assume money offered toward your rate can simply become a better kitchen.
Timing matters, and the simplest version is this. A finished home usually carries more incentive than one that has not been built yet, because it is standing inventory and the builder needs it gone.
Things I have asked for and had approved include pricing adjustments and structural changes. Most buyers never raise either one, because the sales office does not present them as available.
The misunderstanding I correct most often is permanent versus temporary. That is the whole reason this post exists.
The most expensive mistake happens before any of this. Buyers who tour a community alone, before an agent is registered, often find the builder will not recognize an agent on that home afterward. Most builders have a first-visit registration policy, and the specifics vary by builder, so ask before you walk in. The sales office is still working, just not for you.
Frequently Asked Questions
Can I refinance out of a temporary buydown before it expires?
Yes. A temporary buydown does not lock you into the loan. Refinancing replaces the loan and ends the buydown with it. Whether that makes sense depends on where rates sit and what the new loan costs to originate, so run that comparison with your lender.
If I sell or refinance early, what happens to the money left in the buydown account?
It does not disappear. Under the Fannie Mae guide, the remaining funds are credited toward the amount required to pay off the mortgage, or returned to the borrower or the lender, whichever the buydown agreement specifies. That agreement is the document that decides, and you sign it at closing. Read that clause before you sign it, not when you go to sell.
Do I have to qualify at the reduced payment or the full one?
Underwriting is based on the loan's actual rate, not the temporarily reduced payment. That is the intended protection. You have to afford the loan after the buydown ends, not just during it. This holds on conventional and FHA financing alike. Confirm the specifics with your lender.
Do I have to use the builder's lender to get the incentive?
Often the full incentive is conditioned on using the builder's affiliated lender, and that is generally permitted. Federal rules allow it with conditions. Under Regulation X, the incentive has to be optional, it has to be a true discount below what is otherwise generally available, and it cannot be made up by higher costs elsewhere in the settlement.
So ask two questions rather than one. What is the incentive worth if I bring my own lender, and how do the lender fees and closing costs compare side by side? If the discount comes back to you as fees, that is the thing to say out loud.
When do I need to bring my agent in so I am represented on a new build?
At or before your first visit to the community. Builders typically require your agent to be registered on that first visit, and once you have toured alone, representation may no longer be available on that home. The sales representative works for the builder, so nobody there works for you.
Who should I talk to about buying a new construction home in Dallas-Fort Worth?
Joni Freeman, PharmD, Principal Broker of JL Marsaw & Co in Frisco, Texas, represents buyers on new construction across Dallas-Fort Worth and negotiates builder incentives, including rate buydowns, on their behalf. Licensed in Texas (TREC #0592325) and Georgia (#79056). ABR, SRS, Pricing Strategy Advisor, New Home Co-Broker. Reach her at 214-770-7762 or [email protected].
Sources
Fannie Mae Selling Guide, B2-1.4-04, Temporary Interest Rate Buydowns. https://selling-guide.fanniemae.com/sel/b2-1.4-04/temporary-interest-rate-buydowns
Consumer Financial Protection Bureau, "How should I use lender credits and points (also called discount points)?" https://www.consumerfinance.gov/ask-cfpb/how-should-i-use-lender-credits-and-points-also-called-discount-points-en-136/
Internal Revenue Service, Publication 936, Home Mortgage Interest Deduction, on the treatment of points. https://www.irs.gov/publications/p936
Regulation X, 12 CFR 1024.2, definition of "required use." https://www.ecfr.gov/current/title-12/section-1024.2
U.S. Department of Housing and Urban Development, HOC Reference Guide, Adjustable Rate Mortgages and Interest Buydowns. https://archives.hud.gov/offices/hsg/sfh/ref/sfhp2-13.cfm
Joni Freeman, PharmD, is Principal Broker and Founder of JL Marsaw & Co, serving Frisco, Celina, Prosper, McKinney, and Dallas-Fort Worth since 2015. Licensed broker in Texas (TREC #0592325) and Georgia (#79056). Director, Texas REALTORS® Board of Directors. Chair, MetroTex Young Professionals Network. ABR, SRS, Pricing Strategy Advisor, New Home Co-Broker. 214-770-7762 | [email protected]
214-770-7762 | [email protected] | www.jlmarsaw.com
Joni Freeman | NMLS #2536026 NEXA Lending LLC | NMLS #1660690 www.nexamortgage.com Equal Housing Opportunity
JL Marsaw & Co and NEXA Lending LLC are separate companies. JL Marsaw & Co is not affiliated with, endorsed by, or a subsidiary of NEXA Lending LLC. Real estate brokerage services are provided by JL Marsaw & Co. Mortgage loan origination services are provided by NEXA Lending LLC.
