If you've been looking at new construction around Burleson, Joshua, Alvarado or Godley, you've probably seen offers like "rates as low as 4.99%" or "2-1 buydown available." With mortgage rates around 7.4%, buydowns have become one of the most common incentives builders and sellers offer. Here's how they actually work.

What is a rate buydown?

A buydown is money paid up front, usually by the builder or seller, to lower your interest rate. There are two main types.

Permanent buydown

With a permanent buydown, "discount points" are paid at closing to lower your rate for the entire life of the loan. One point equals 1% of the loan amount. How much each point lowers your rate varies by lender and market.

Best for: buyers who plan to keep the home and the loan for a long time.

2-1 temporary buydown

A 2-1 buydown lowers your rate by 2% in the first year and 1% in the second year. Starting in year three, you pay the full rate for the rest of the loan. The seller or builder funds the difference up front.

Here's an example on a $350,000 loan with a 7.40% rate (principal and interest only):

  • Year 1 at 5.40%: about $1,965 a month
  • Year 2 at 6.40%: about $2,189 a month
  • Years 3 to 30 at 7.40%: about $2,423 a month

In this example, the buydown costs the seller or builder roughly $8,300, and it saves you about the same amount over the first two years.

Best for: buyers who expect their income to grow, or who want lower payments while they settle in. Keep in mind that you'll typically need to qualify at the full rate, and your payment will go up in year three. If rates drop, you may be able to refinance, but that's never guaranteed.

Which is better?

It depends on how long you plan to stay, your budget and what's being offered. Sometimes the same incentive dollars could instead go toward closing costs or a lower price. I always recommend comparing the options side by side before choosing.

Ask the right questions

  • Is the advertised rate available with any lender, or only the builder's preferred lender?
  • Is it a permanent rate or a temporary buydown?
  • What's the total incentive amount, and what else could it be used for?
  • What will my payment be in year three and beyond?

I help my buyers compare builder incentives and run the numbers with a lender before they commit. If you'd like to see your options, you can start your pre-qualification here, or call or text me, Ashley Forston, at (817) 240-1157.

Examples are for illustration only and use principal and interest. Your actual rate, payment and qualification will depend on your lender, credit, loan type and other factors. Talk with a licensed lender for a quote.