The builder rate buy-down: who pays for it, and what it costs you

What a buy-down actually is

Money paid up front to the lender to reduce the interest rate — either for the first years or for the life of the loan. On new construction, the builder pays it.

Two shapes, and they behave very differently:

• Temporary (a 2-1 or 3-2-1 buy-down). The rate is reduced for the first two or three years and then returns to the note rate. Your payment rises on a schedule you agree to at closing.
• Permanent. Discount points are paid to lower the rate for the whole term. More expensive to buy, and worth far more if you keep the loan.

The trade nobody spells out

The buy-down is not free. It comes out of what the builder would otherwise have given you as a price reduction or a closing credit.

A rough sense of scale on a $320,000 loan: a permanent buy-down of one percentage point commonly costs somewhere around 3 to 4 points — $10,000 to $13,000 — and saves roughly $210 a month. A temporary buy-down costs the difference in interest for the years it covers, which is much less.

So the question is not “is 4.99% better than 6.75%”. It is: would I rather have $12,000 off the price, or $210 a month?

Our own arithmetic, one percentage point on a $320,000 loan over 30 years, ignoring the time value of money — which is why the three-year row is closer than it looks.

The condition attached to it

Almost always: use the builder’s lender.

That is legal and normal, and it is also where the buy-down can quietly get paid for. Compare the builder lender’s rate, fees and terms against an outside lender’s, then compare the outside lender’s deal plus whatever incentive you lose. Sometimes the builder’s package genuinely wins. Sometimes the buy-down is funded by a higher note rate and thicker fees, and you are paying for your own discount.