Home Grown Property Group

Price Cut vs Rate Buydown Calculator

A builder offers one dollar figure. Take it as a price reduction, a closing cost credit, a permanent rate buydown, or a 2-1 temporary buydown? Enter the numbers and see which one leaves you best off over the years you actually plan to own the home.

Your Scenario

Same home, same incentive, four ways to apply it

Rule of thumb. Lenders price points differently every day; your lender's quote replaces this. Permanent reductions are capped at 2 points.

Best use of $15,000 over 7 years
Permanent rate buydown

Lowest net outlay of the four at $194,956. The gap between the best and worst choice here is $18,885.

OptionCash at closingYear 1 paymentYear 3+ paymentNet outlay
Price reduction
6.5% on $391,500
$43,500$2,475/mo$2,475/mo$213,841
Closing cost credit
6.5% on $405,000
$30,000$2,560/mo$2,560/mo$206,215
Permanent rate buydownBest
5.574% on $405,000
$45,000$2,318/mo$2,318/mo$194,956
2-1 temporary buydown
4.5% then 6.5% on $405,000
$39,218$2,052/mo$2,560/mo$206,215

Net outlay = cash at closing + every principal-and-interest payment over the hold period, minus the principal you paid down. Lower is better. Taxes, insurance, HOA and PMI are left out on every side because they are the same house.

Price reduction

Lowers the loan and the down payment. The smallest monthly saving of the four, but it is permanent and it lowers the basis for property taxes and the balance you owe on day one.

Closing cost credit

Keeps the most cash in your pocket at closing and changes nothing else. Lenders cap how much credit can be applied, so a large figure may not all be usable this way.

Permanent rate buydown

Buys the rate down for the life of the loan (about 0.93 points off at the assumed cost of 1% of the loan per quarter point). Pays off the longer you keep the loan; a refinance or sale in the first few years forfeits most of it.

$0 of the incentive could not be used this way and is shown as a closing credit instead.

2-1 temporary buydown

The lowest payment in years one and two, then the full note rate from year three. Over any hold of two years or more its net outlay matches the closing credit by design: a 2-1 is the same dollars, delivered as lower payments up front instead of cash at closing. Choose it for cash flow in the first two years, not for total cost.

$5,782 of the incentive could not be used this way and is shown as a closing credit instead.

Get the real numbers for a specific builder

Which of these options a builder will actually allow, and at what cost, depends on the builder, its preferred lender and the home. An HGPG agent will run this comparison against the live offers in your price range and tell you which one to ask for.

Note: Estimates for educational purposes only, not a loan quote. Points pricing, credit caps and buydown availability vary by lender and builder. Confirm every figure with a mortgage professional before relying on it. Want to layer down payment assistance on top? Use the incentive stacking calculator.

Price Cut or Rate Buydown: Common Questions

Is a rate buydown better than a price reduction on a new construction home?

Usually, if you keep the loan long enough. A dollar of builder incentive spent on a permanent rate buydown typically lowers the monthly payment more than the same dollar taken off the price, because points buy down interest on the whole loan. The price cut wins when you expect to sell or refinance within a few years, when the points are priced expensively, or when you value a lower purchase price for property tax and resale reasons. Run your own hold period in the calculator above; the answer flips depending on it.

How does a 2-1 buydown work on a new construction home?

A 2-1 buydown lowers your payment for the first two years only. Year one is calculated at the note rate minus two percentage points, year two at the note rate minus one, and from year three you pay the full note rate. The builder funds the difference up front into an escrow account, so the cost of a 2-1 is exactly the two years of payment savings. It is the cheapest way for a builder to advertise a low payment, and it is most useful to a buyer who expects to refinance or move before year three.

Can I choose how a builder incentive is applied?

Often, within limits. Many production builders advertise a flat dollar figure that can go toward closing costs, a rate buydown or design center upgrades, and some will apply part of it to the price instead. The catch is that most incentives require using the builder's preferred lender, and lenders cap how much credit can be applied to closing costs. Ask before you sign, because the way the incentive is applied is usually written into the contract and is hard to change afterward.

Do I lose the buydown if I refinance?

A permanent buydown bought with points is gone when the loan is paid off, whether by refinance or sale, which is why it only pays off over a longer hold. With a 2-1 temporary buydown, any unused escrow balance is normally applied to your loan payoff when you refinance or sell, so you do not simply lose it, but you also stop benefiting from the reduced payments. A price reduction is the one option that survives every refinance, because it lowered what you owed on day one.