Got a $40,000 Builder Incentive? Smart Ways to Use It (and a Rate Buydown on an ARM)

A home buyer recently asked on Reddit: the builder is giving me $40,000 to use however I want. My plan is to put all of it toward buying down the rate on a 7/6 ARM, so the payment is easier during the expensive daycare years, and then refinance before the rate adjusts. Is that smart, or is there a better way to use the money?

It is a great problem to have, and with builders across the Treasure Coast offering incentives on new construction, I hear versions of it often. Here is how I would think it through.

First, how a buydown on an ARM really works

A 7/6 ARM has a fixed rate for the first seven years. After that, the rate adjusts every six months based on a market index plus the lender's margin. Paying discount points lowers the starting rate, but only for that first fixed period. Once the loan adjusts, the points you paid no longer help.

That matters because the plan includes a refinance. If rates drop and you refinance in year three or four, whatever part of the buydown you have not "used up" yet is gone. You paid for seven years of a lower rate and only got three or four.

Do the break-even math. Divide the cost of the points by the monthly savings. For example, if $20,000 of points saves you $250 a month, it takes 80 months, about six and a half years, to get your money back. If you expect to refinance well before that, the buydown may not pay for itself. Ask your lender for the exact numbers on your loan.

Check how much of the $40,000 you can actually use

"Use it however you want" usually has limits. On a conventional loan, Fannie Mae caps what a builder or seller can contribute, based on your down payment, for a home you will live in:

Your down payment	Maximum builder/seller contribution
Less than 10%	3% of the price
10% to 25%	6% of the price
More than 25%	9% of the price

On a $500,000 home with 10% down, the cap is $30,000. Anything above the cap, or above your actual closing costs, is treated as a price reduction instead. These credits also cannot be used for your down payment or required reserves, and you generally cannot take them as cash. FHA and VA loans have their own limits, so ask your lender which rules apply to you.

Five ways to use a builder incentive

1. Permanent rate buydown (points)

Best when you plan to keep the loan at least until the break-even point. On a 30-year fixed, the savings last for the life of the loan. On an ARM, they last only through the fixed period.

2. Temporary buydown, such as a 2-1

A 2-1 buydown lowers your rate by 2% in year one and 1% in year two, then it goes to the full note rate. It puts the savings right where this buyer wants them, in the first years. Fannie Mae allows temporary buydowns on ARMs with an initial fixed period of three years or more, including a 7/6 ARM, but you still have to qualify at the full note rate. Not every lender or builder offers it, so ask.

3. Pay all your closing costs and prepaids

Closing costs, prepaid taxes and insurance, and escrow deposits can add up to thousands. If the builder covers them, the cash you would have spent stays in your bank account. During tight daycare years, an emergency fund can be worth more than a slightly lower payment.

4. Take a price reduction

A lower price means a smaller loan, and in Florida your property taxes are based largely on the price you pay. It lowers your payment less than a buydown does, but the savings are permanent and you start with more equity. Ask whether the builder will reduce the price instead of giving a credit. Some will, especially on homes that are already built.

5. Mix and match

Many buyers do best with a combination: cover closing costs first, then put what is left into points or a temporary buydown.

Compare the lender, not just the incentive

Builder incentives are often tied to using the builder's preferred lender. That can be a good deal, but get a Loan Estimate from at least one outside lender too. A big incentive on top of a higher base rate or higher fees may not be the bargain it looks like.

Frequently asked questions

Can I take the builder's incentive as cash?
Usually not. Credits generally have to go toward closing costs, prepaids or a rate buydown, within your loan program's limits.

Can I use the incentive for upgrades?
Sometimes, depending on the builder. Upgrades add value you can see, but they do nothing for your monthly payment. Compare that with what the same money would save as a buydown or price cut.

Is it risky to count on refinancing later?
Yes. Rates may fall, or they may not. Choose a payment you can handle even if the loan adjusts, and treat a future refinance as a bonus, not the plan.

This article is general information, not legal, tax or lending advice. Loan program rules change, so confirm the details with your lender.

Wayne Gebhardt, Broker, Homesaver Real Estate LLC, 395 SW Sally Way, Stuart, FL 34997