Negotiating with a Builder: Mortgage Buy Downs
In the days of higher interest rates (as happens periodically), the reason that builders can’t sell their homes is that people can’t qualify for mortgages. As an inducement to purchase, therefore, some times builders will be willing to negotiate a buy down.
In a buy down, the builder gives a certain amount of cash to a lender at the time you get a mortgage and, in return, the lender offers you a lower interest rate. Typically the lower rate varies. For example, it could be 3 percent lower than market the first year, 2 percent the second, 1 percent the third, and at market the fourth.
This reduction will lower your monthly payments, often significantly, and make it far easier for you to qualify. Indeed, you may be thinking that you’re getting a real bargain here.
What’s important to keep in mind, however, is that there’s no free meal in real estate. What is given away by one hand is often taken back by the other. The builder may have increased the price of the home to offset the buy down on the mortgage. This means you could end up paying more for the property in order to get a lower interest rate.
Of course, as a good negotiator, you’ll go for both a lower rate and a better price.
The Bottom Line
Yes, you can negotiate price, terms, options, and upgrades with a builder. But your success will often be determined not only by how well you handle the negotiations, but also by the market conditions at the time and, specifically, how successful at selling new homes the builder happens to be.