Is the incentive from the builder really an incentive? Not a lot of people know this but when you accept the incentive that the new build is offering, they require you to use their loan officer and the lender that they use sometimes charges significantly higher interest rates and fees which offset the incentive that they’re giving.
Real Examples: What Builder Incentives Actually Cost You
I’m going to give you a few examples that I’ve run into to show you exactly what I mean. In my first scenario the builder was giving a $2,500 incentive to use their lender. The lender was charging $1,475 in fees that I was not charging. So really the incentive was only a net of $1,025. But my interest rate was about half a percent better and it came with a $500 credit towards the closing costs.
So realistically the net incentive was only about $500 but that half a percent interest rate got the client $140 off on their monthly payment. So essentially the builder was giving a $500 credit in order for them to take an interest rate that was going to cost them $140 a month in extra monthly payments. So the incentive didn’t really make sense because over the long run they’re going to pay significantly more.
In my next scenario the lender was offering a $7,000 credit to use their lender. This may seem like a lot of money but when you broke down the numbers the lender that they required them to work with was charging $6,430 in lender fees that I was not charging.
So the incentive was really only $570 but my interest rate was a quarter of a percent better and also came with a $500 credit towards the closing cost. So really that incentive with all the fees and the higher rate baked in was only about $70 for the net incentive. And then they were going to be taking a higher interest rate. So although $7,000 sounded great, in the real breakdown of everything they were taking a higher interest rate and really getting nothing in return.
When a Builder Incentive Actually Makes Sense
Now there are some scenarios where the incentive makes sense. I had one recently where the builder was offering an incentive that covered all the closing costs and brought down the interest rate to an interest rate that I could not touch if you use their lender. In this case here they went with that lender because it made sense to do. But you want to avoid just getting lured in with the flashiness of “hey we’re gonna offer you X amount.”
That’s what happens is people hear oh they’re going to give me $7,000 to use their lender. I don’t want to lose that but then when you break down these numbers you can tell that it’s not truly an incentive.
My recommendation is if you’re looking at doing a new build and you’re considering using the incentive and using their lender, reach out to a local independent mortgage broker and then compare apples to apples with them. See what the incentive is, see what they’re offering and how that compares. If you didn’t take the incentive and used maybe a local mortgage broker that had a better rate or lower fees or something like that. Truly make sure that you’re actually getting a deal before you move forward with that because in the long run some of these, the incentive might actually be costing you more.
Feel free to reach out if you have any questions. Happy to help.
