Rate Buydown vs. Price Cut: Which Is the Better Deal on a New Build?
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Builders almost never cut price. What they do is offer incentives — and the most common debate buyers face is: should I take the rate buydown or push for a lower price? Here's the honest math.
Quick Answer
In most cases, a 1-point permanent rate buydown beats a $10,000 price cut over a 5–7 year hold. Why? Because a rate reduction compounds monthly across the entire loan balance, while a price cut only affects the small portion of principal you're paying down each month. That said, if you need cash-to-close relief, a credit may be more useful than a rate reduction in the short term.
The best approach: ask for the specific combination that matches your actual situation — down payment, timeline, and how long you plan to keep the loan.
The Math: Rate Buydown vs. Price Cut
Scenario: $800,000 home, 20% down ($160,000), $640,000 loan, 7.0% market rate.
Option A — $10,000 price cut: Loan becomes $632,000. Monthly savings: ~$66/month. Break-even vs. closing costs: ~18 months.
Option B — 1 point rate buydown (~$6,400 cost, usually paid by builder): Rate drops from 7.0% to 6.75%. Monthly savings: ~$106/month vs. 7.0% on $640K loan. Break-even: ~60 months. But over 7 years, saves ~$8,900 total.
Option C — 2-1 temporary buydown (rate is 5.0% year 1, 6.0% year 2, then 7.0%): Monthly savings year 1: ~$640/month. Year 2: ~$320/month. After that: no savings. Best if you plan to refinance within 2–3 years.
The rate buydown wins if you keep the loan. The price cut helps if you're going to refinance quickly or are tight on down payment.
When a Price Cut Actually Makes Sense
- You're very likely to refinance in 2–3 years (rate-to-market scenario)
- You need a lower loan amount to qualify
- The price cut is significantly larger than the buydown would be (rare but possible on standing inventory)
When the Rate Buydown Wins
- You plan to hold the home 5+ years without refinancing
- You want a lower monthly payment now and going forward
- Your cash-to-close is covered and the payment matters more than equity
→ See also: How to Read a Loan Estimate for New Construction
The Third Option Most Buyers Forget
A closing cost credit. If the builder offers $15,000 in incentives, some buyers benefit most from taking it entirely as cash-to-close relief — not rate, not price. This applies when:
- You're stretching to cover down payment + closing costs
- You have reserves but need help getting to the table
- The rate matters less than having a financial cushion after close
How to Compare Incentive Options Side-by-Side
Ask the builder's lender for three Loan Estimates:
- Market rate, no credits
- With the proposed rate buydown
- With a cash credit equivalent
Compare: monthly payment, cash due at closing, APR, and total interest paid at 5 and 10 years. The LE format makes this comparison straightforward.
Frequently Asked Questions
Q: What is a rate buydown on a new construction home?
A: The builder pays discount points to reduce your interest rate — either permanently (forever) or temporarily (1–2 years). Each point costs roughly 1% of the loan amount and reduces rate by about 0.25%.
Q: How much does a 1-point buydown save per month?
A: On a $600K loan, roughly $90–$100/month per 0.25% rate reduction. On a $800K loan, roughly $120–$135/month.
Q: Is a 2-1 buydown worth it?
A: Only if you expect to refinance before year 3. After the buydown period ends, you're back to the market rate. If rates haven't dropped enough to refinance, you've lost the benefit.
Q: Will the builder cut list price instead of giving incentives?
A: Rarely on to-be-built homes. More often on standing inventory that's been sitting 90+ days. Frame it as an incentive ask first — you'll have more success.
Q: Can I get both a rate buydown AND a credit?
A: Sometimes — especially on standing inventory or near quarter-end. Ask for both; the worst they say is no.
Q: Does the type of incentive affect my loan approval?
A: All incentives must be disclosed to your lender. Rate buydowns are factored into your qualifying rate; credits are disclosed as seller contributions. Both are standard — your lender handles this routinely.
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