New construction homes have an unearned reputation: a higher cost than resale homes and out of reach for many home shoppers. In today’s environment, where affordability is top of mind, buyers may pass over new home communities entirely.
Affordability is about more than the home price, though. For financed purchases, the monthly payment is the number to consider. When you combine builder incentives with flexible financing strategies, new construction can be the smarter way to go.
The 30-Year Fixed Isn’t Wrong, It’s Just Not the Only Option
Home buyers often enter the market with one home financing plan in mind: the traditional 30-year fixed rate mortgage. They expect to have one interest rate locked in for the full life of the loan, with a principal and interest payment that never changes.
The 30-year fixed is popular because it’s familiar, not because it’s the only smart choice.
There are several different loan structures worth considering for the potential savings and flexibility they offer, particularly if you’ve been waiting for interest rates to fall. Two of those are the 3-2-1 buydown and the permanent buydown.
A rate buydown is money paid upfront to lower the interest rate on the mortgage loan, either for a set period of time or the full term of the loan. The lower initial rate not only allows a lower monthly payment, even if only temporarily, but also helps buyers who are blocked by the idea of today’s higher rate environment and will accept rates only below a certain level. The buydown can be paid by the buyer, seller or, as is often the case with new construction, through a builder incentive.
The type of buydown that will work best for you comes down to two primary factors: how long you expect to live in the home and whether your income or household finances are likely to change over the next few years.
The 3-2-1 Buydown: Lower Payments When You Need Them Most
If you’re looking for a payment that’s more manageable initially but will increase over time, a 3-2-1 buydown may be for you. The buydown lowers the interest rate by 3% in year one, 2% in year two and 1% in year three before it settles into its permanent rate in year four. The permanent rate is set at your closing, so you’ll know the payment to expect for the full length of the loan.
A 3-2-1 buydown works well for a family that expects their income to grow or their expenses to fall in the near future. Perhaps a second-income earner will be returning to work after family leave, or a family member is planning a career change. It could be that a student loan or other debt will be paid off before the higher principal and interest payments arrive.
This program also works well if you would like to ease into larger payments. The expenses of a new home are highest in the first few years after a home purchase. With the lower initial payment, you can divert cash to moving costs, new furniture and the general outlays of settling into your new community.
Accessing this initial lower payment requires some tradeoffs. First, the buydown must be funded, whether you pay it yourself or it’s offered as a seller or builder incentive. Investing in a lower initial rate means you’ll give up the opportunity to put cash or concessions toward other expenses, such as closing costs or premium design selections.
Second, the monthly payment will increase over time. For the best protection, be sure you can make the future payment with your current income and debt load. You don’t want surprise expenses or job changes to get in the way of your dream home down the road.
The Permanent Buydown: Paying for Certainty
For a permanent buydown, the buyer, seller or builder pays discount points at closing to lower the interest rate for the full life of the loan. Some home buyers want to get a lower interest rate than what a traditional 30-year fixed offers and still prefer the idea of making a consistent principal and interest payment over the full life of the loan.
But the desire for consistency shouldn’t be the driving factor in making the decision. You should consider a permanent buydown only if you plan to live in the home long enough to pass the break-even point. That’s the month when you’ve saved enough on interest to equal the upfront cost of the buydown.
The basic formula is:
Break-Even Point = Buydown Cost ÷ Monthly Savings
Your Kiper lender can perform a full calculation for your specific loan amount and rate. If you plan to move or refinance before that point, a shorter term buydown is probably a better choice.
A Quick Word on the Other Options Out There
The 3-2-1 buydown and the permanent buydown are strong alternatives to a 30-year fixed rate, but they are not the only ones. Your Kiper lender can walk you through many programs, including some that can be used together.
The 15-year fixed rate loan works for home buyers who want the long-term savings of a lower interest rate, even with a higher payment.
Adjustable rate mortgages (ARMs) are good for buyers who will stay with their loan a short time and have a tolerance for rate and payment uncertainty, since the interest rate adjusts with the market. Hybrid ARMs, often shown as 5/1, 7/1 or 10/1, offer a set rate for a fixed number of years before adjusting.
2-1 and shorter buydown options can be added on top of ARMs or 30-year fixed loans for greater potential savings.
Your Kiper lender will also review various loan types, in addition to loan structures. Conventional, government-sponsored mortgages are the most common. Private jumbo loans fund larger amounts, while FHA and VA loans can offer lower rates and down payments for borrowers who qualify.
How Kiper’s Incentives Change the Equation
While the loan structures and programs discussed here can be used on resale or new properties, Kiper’s buyer incentive shifts the balance of affordability toward new construction.
Our current buyer incentive can be applied to closing costs, a buydown (temporary or permanent), or design selections at the Kiper Design Center (depending on your home’s stage in construction). And you don’t have to choose just one. The incentive can be split among all or diverted to a single priority.
That flexibility allows a buydown to be covered without the buyer funding the full cost out of pocket, and it’s one of the concrete ways a new Kiper home can become more attainable than a similarly priced resale home.
The terms vary by community and even individual homes. The Kiper sales team can provide specific details.
Choosing What Fits: A Framework, Not a Formula
When it comes to financing a new construction home, no single answer suits every buyer. Your Kiper lender knows there is no “best” answer and will walk you through your options to find the one that’s right for you.
Consider these questions early, and you’ll move through the process confidently and more quickly:
- How long do you realistically plan to stay in this home?
- Will your income or household finances likely change in the next one to three years?
- Would you rather have a lower payment now or a fixed, predictable payment from the start?
- Where would Kiper’s incentive help you most: closing costs, a rate buydown or your design selections?
Only you can answer the questions, and the answers will result in a financing plan specific to you and your priorities. Your Kiper lender is dedicated to helping you discover the combination of loan structures and programs that meet your needs.
Erasing the Fear of Financing
A fear of obtaining and understanding home financing is often the barrier that keeps would-be home buyers on the sidelines. Some would-be home shoppers don’t even want to visit new home communities because they think a purchase is out of reach.
But while you wait in uncertainty and hope for rates to fall, home values will likely continue to rise. You miss out on equity-building momentum, not to mention time spent in the home and community you really want.
Knowing about your financing options removes the barrier. Kiper’s team and preferred lending partners can take you through the numbers before you even step foot in a model home, if you’d like. No matter what you eventually decide, the Kiper team can help you make an informed decision; there’s no need to delay your next move due to uncertainty.
Visit the Kiper sales team in your preferred community to review current incentive offers and financing options. When you’ve broken the financing barrier, and we’re betting it will happen soon, we hope you’ll take a tour to discover the home you’ve waited to buy.