Buying a New Build VS Existing Home - It Could Boil Down to Interest Rate....

New construction plays a big role in the housing market, even if resale homes get most of the attention. Existing homes sell at a pace of around 4 million a year, while about 800,000 new homes are expected to sell this year.

When you buy a resale home, the seller can’t offer financing, so you have to get a loan through a lender, broker, or online platform. That lender has no connection to the seller and no reason to influence the sale price. Because of that, the price of the home and the mortgage terms are negotiated separately. Builders, on the other hand, often have in-house mortgage companies — and that’s where the incentives come in.

Rates are still higher than they were during the pandemic. Even though prices are softening markets, builders don’t want to drop sales prices. Cutting prices affects the value of all their remaining inventory because each sale becomes a comparable for future appraisals. A lower price today can ripple through their entire community. A mortgage incentive works differently — it costs the builder money, but it doesn’t lower the recorded sale price of the home next door.

Builders would rather spend money on a rate incentive than cut the price. If they’re putting $10,000 toward a deal, they want it to protect the sticker price.

Are rate buy-downs a good idea?

Data doesn’t include another common perk: temporary mortgage rate buydowns. These usually come in a “3/2/1” or “2/1” structure. For example, a 2/1 buydown drops the rate by 2% the first year and 1% the second year.

Let’s say you’re buying a $375,000 home, putting 20% down, and financing $300,000. A 7% mortgage would run about $1,996 a month. With a 2/1 buydown, the first-year rate falls to 5%, dropping the payment to about $1,610 — saving roughly $386 a month in that first year. You still have to qualify at the full 7%.

For sellers, a 2/1 buydown usually costs a little over 2% of the loan amount. On a $300,000 mortgage, that’s $6,000–$7,000 placed into an account that offsets your payments each month. If you refinance and money is left, it rolls into the new loan.

Builders can sweeten the pot even more. One example: a base rate of 3.99% on a 30-year FHA loan paired with a 2/1 buydown — dropping the first-year rate to 1.99% and the second year to 2.99%.

Should you or should you not? 

A few things to consider:

 - Temporary buydowns save money upfront, but your payment goes up later. When life happens, can you truly handle that jump?

- As the market moves to a buyer's market, will you be upside down and not be able to sell?  I always worry about our military with this. (In Colorado Springs, we have 5 military installations; it's a real concern.) If they put no money down and the market is rough for sellers, what happens then?  If they get orders, they will have to try to rent it, which they will probably have to come up with the difference between the going rate of renting and the mortgage. Sell and break even (if they are lucky), sell as assumable, short-sale it, or let it go into foreclosure. 

All of this to say, make sure you have a realtor that is truly looking out for your best interest and NOT a paycheck.