By Mike Baker | The Rate Shop | NMLS #259076
A builder's low mortgage interest rate can be a genuinely good deal, it also can be a terribly awful deal. To find out, compare the interest rate AND the fees after any builder credits, using the same loan terms. Then review the builders credit conditions, the rate lock and the builder's contract before you sign or put money down.
“The builder is offering a much lower interest rate if I use their lender.”
My first question is simple:
“But how much are you paying for that interest rate?”
A low interest rate is one thing. Paying thousands, or sometimes tens of thousands of dollars, to get it is a completely different conversation.
I have reviewed builder-lender offers that looked incredible and turned out to be legitimately good deals. In those cases, I have told buyers to take them.
I have also reviewed offers where the numbers did not come close to the sales pitch.
You should not have to become a mortgage expert to tell the difference. You do need someone willing to walk through the entire offer with you.
Start with Box A. Add up every lender fee.
On page 2 of a Loan Estimate, look for Section A: Origination Charges. I often call it Box A.
You might see an administration fee, processing fee, underwriting fee, origination fee and discount points. One lender might combine charges into one line. Another might split them across several lines.
Add them up. Five smaller charges can cost you more than one larger-looking charge. Multiple line items alone do not make an offer bad. What matters is the total and what you receive for it.
Discount points are an upfront cost associated with getting a lower interest rate. They are different from a processing or administrative fee. Ask the lender to explain both the points and the other charges. The CFPB's Loan Estimate explainer shows where to find these items.
Box A is the starting point, not the entire comparison. We also need the other closing costs, credits, loan amount, payment and cash required at closing.
What if the builder's lender gives you a fee worksheet instead?
Send me that, too.
A worksheet can help us start a conversation, but its layout may make comparisons harder. Ask for every page, an itemized list of charges and the written assumptions behind the interest rate.
A worksheet is not the same as a Loan Estimate. For most mortgages, once you submit the six application details required by federal rules, a Loan Estimate generally must be delivered or mailed within three business days. A lender cannot make you supply extra verifying documents first. The CFPB explains that application trigger.
Receiving a worksheet before that point does not automatically mean something is wrong. It does mean we should understand what we are comparing.
A $15,000 builder credit does not automatically save you $15,000
A large credit can make you feel foolish for considering another lender.
But if that lender's charges are $20,000 higher, a $15,000 credit does not erase the difference.
Here is a simplified illustration. Assume the same interest rate, loan amount and term, with identical other costs. Assume the full builder credit can be used against the eligible costs shown. These are made-up numbers to explain the comparison, not a loan offer.
Builder's lender
Lender fees, including points: $25,000.
Applicable builder credit: $15,000.
Net cost of these items: $10,000.
Outside lender
Lender fees, including points: $5,000.
Applicable builder credit: $0.
Net cost of these items: $5,000.
In this example, the offer with the $15,000 credit still leaves the buyer paying $5,000 more for the items shown.
Change the numbers and the builder's offer could win. If it also has a lower interest rate, we need to compare the ongoing payment and costs over the time you expect to keep the loan.
The point is to compare the deal after the credit.
Get the credit's terms in writing: who provides it, which costs it covers, whether it expires, and what happens if you choose a different lender. A builder's seller credit and a lender credit are different sources of help. Do not assume the builder's credit follows you to another lender, however it may, we need to review the contract to be sure.
How long will it take to earn back the extra cost?
If the lower rate requires more money from you after credits, ask how long the payment savings take to recover that additional cost.
For example, $15,000 in additional net upfront cost divided by $150 in monthly payment savings is 100 months. That is eight years and four months.
That is a simple cash-flow break-even illustration. A fuller comparison also considers the remaining loan balance, any financed costs and how long you actually keep the loan.
I would want a buyer to think hard about that timeline. Selling or refinancing before reaching it could change which offer was the better fit. Someone keeping the loan much longer might reach a different conclusion.
The CFPB explains the tradeoff between upfront points and ongoing interest. My job is to turn that tradeoff into numbers that make sense for your situation.
Make sure both lenders are quoting the same deal
Compare offers from the same day when possible, with matching loan amounts, down payments, loan types, terms and lock periods.
Then check the complete payment. A smaller tax or insurance estimate can make one offer look better without lowering your actual bills. On new construction, ask whether the tax estimate reflects the finished home or just the land. My guide to mortgage payment estimates, taxes and insurance explains why that matters.
Also ask whether the advertised payment reflects a permanent interest rate or a temporary buydown. If it is temporary, review the payment after the subsidy ends. Our temporary buydown calculator can help illustrate that payment schedule.
For a broader comparison, read what to check when a lender matches an interest rate. Matching the rate is only part of matching the offer.
Review the builder's contract before committing
In my experience working with buyers in the Kansas City Metro, many builders use their own purchase agreements. Do not assume the terms match a contract you used on a previous home.
My advice is to involve your own Realtor before visiting the model home. Have a real estate attorney review legal terms you do not understand, especially if you are buying without an agent. The American Bar Association highlights independent contract review when buying from a builder.
Your Realtor can help evaluate the property, transaction and builder. I can review the mortgage numbers. An attorney can advise you on the legal obligations.
Pay attention to deposits and refund conditions, financing deadlines, completion dates and the written conditions for incentives. If you have already signed, get advice before changing lenders or missing a deadline.
What if the builder's lender really is offering the better deal?
Then I will tell you that.
I want you to get your best deal, even when that means using someone else.
I have also checked back with buyers to compare their locked Loan Estimate with the offer they were promised. Look at the rate-lock information on page 1 and confirm the expiration date. A Loan Estimate by itself does not mean the interest rate is locked.
A lock has conditions, and application changes or a delayed closing can affect it. The CFPB's rate-lock guidance explains what to ask. If something changes, ask why and get the explanation in writing.
Questions buyers ask about builder-lender offers
Should I use the builder's preferred lender?
Use the lender whose complete offer fits you best after comparing interest rates, net fees, credit conditions and service. Sometimes that is the builder's lender. The size of the advertised incentive alone cannot answer the question.
Are high discount points always a bad deal?
No. Consider who pays them, your additional cost after credits, the payment savings and how long you expect to keep the loan. Do not judge the offer from the rate or points alone.
Can I keep the builder's credit if I choose another lender?
Do not assume so. Read the written incentive terms and ask the builder to confirm what changes. Compare the outside offer using the incentives you can actually retain.
What should I send for a second opinion?
Send the fee worksheet or, ideally, the Loan Estimate, the builder's contract and the terms of every credit in writing. Send all of it before signing or putting money down, while there is time to review your options.
Bring me the whole offer. Conversations are free.
You are making a purchase worth hundreds of thousands of dollars. Asking someone to explain the numbers is reasonable.
Between your Realtor and me, we can help you review the property transaction and financing, and identify questions that need clarification or legal review.
If the builder's deal is better, I will tell you. If it is not, I will show you why.
Schedule a free mortgage consultation before you sign or put money down. Send me the whole offer so we can compare the whole deal.
