Builder incentives are money the builder puts toward your purchase instead of, or alongside, a lower sticker price, most often in the form of a lower mortgage rate or a credit toward closing costs. They exist because builders generally protect their base prices to avoid dragging down the appraised value of every other home in the same section, so instead of discounting the price, they discount the cost of financing or owning it. Here is what actually happens behind that number on the sign.

What counts as a builder incentive?

The two most common forms are a rate buydown, which lowers your mortgage interest rate for some or all of the loan term, and a closing cost credit, which covers part or all of your closing costs, prepaid taxes and insurance, or other fees at closing. Some builders also offer design center credits toward upgrades and options, or a straight price reduction on a specific inventory home. The dollar figure advertised (sometimes shown as a total incentive value, such as an amount toward closing costs and rate combined) is usually the total cost to the builder across whichever combination applies to your specific home and lender.

Why do builders offer incentives instead of just cutting the price?

A builder’s sale prices become the comparable sales, or comps, that appraisers use for every other home in that community, including homes the builder has not sold yet. Cutting a listed price on paper can lower the appraised value of the whole section, which affects the builder’s ability to sell remaining homes at their target prices. A rate buydown or closing cost credit does not appear as a price cut on the sales record, so it lets the builder make a home more affordable to carry each month without changing the recorded sale price.

What is a rate buydown, and how does it actually work?

A permanent buydown lowers your interest rate for the full term of the loan; the builder pays an upfront cost to the lender to buy that rate down, and you pay a lower rate for as long as you have the loan. A temporary buydown, most commonly structured as a 2-1 buydown, lowers your rate by two percentage points in year one and one percentage point in year two, then the rate reverts to the original note rate for the remaining term. A 3-2-1 buydown works the same way over three years instead of two. Temporary buydowns are usually cheaper for the builder to fund than a permanent buydown, which is part of why they show up so often in current incentive offers.

What is a closing cost credit?

A closing cost credit is a set dollar amount the builder contributes toward your actual closing costs, which can include the lender’s origination fee, title fees, prepaid property taxes, and prepaid homeowners insurance. It reduces the cash you bring to closing rather than your monthly payment. Lenders cap how large a seller-paid closing cost credit can be as a percentage of the loan amount, so a very large advertised credit amount may not be fully usable depending on your loan size and loan type.

Why do incentives usually require the builder’s preferred lender?

Most builders only offer their full incentive package if you finance through their preferred or affiliated lender, and offer a smaller incentive, or none at all, if you bring an outside lender. Builders can negotiate volume-based terms and predictable, faster closings with a lender they work with on every home in the community, which is part of why the incentive is tied to using that lender. Nothing requires you to use the preferred lender, but it is worth getting a rate quote from an outside lender too and comparing the full cost, since a lower outside rate can sometimes outweigh a builder incentive tied to a higher one.

Do incentives change from month to month, and why?

Yes. Builders typically set incentive budgets on a monthly or quarterly cycle tied to their own sales targets, and incentives can also shift based on current mortgage rates, how much unsold inventory a section has, and how close the community is to its next price increase. A homesite that is close to completion, or that has sat on the market longer, often carries a stronger incentive than a home that just started construction, since the builder has a stronger interest in moving it before it becomes a completed, unsold home on their books.

What should a buyer actually compare, the incentive or the sticker price?

Compare the full cost of ownership, not the incentive amount by itself: the purchase price, the resulting loan amount, the interest rate over the life of the loan (or over each year of a temporary buydown), and any closing costs you will still owe after the credit is applied. A larger incentive on a higher priced home is not automatically a better deal than a smaller incentive on a lower priced home once the math is run all the way through. Ask any builder to show the actual estimated monthly payment and total closing cash needed with the incentive applied, not just the headline incentive number.

A note on the information in this page: this describes how builder incentive programs generally work in new home sales. Specific terms, amounts, and eligibility vary by builder, by community, and by month, and are set by each builder rather than by this site. Confirm current incentive terms directly with the builder and get a written breakdown before making a decision.