My partner and I are under contract on a
For reference only. Not investment advice.
Question
My partner and I are under contract on a new-construction townhouse listed at $420,000. We are putting 10% down ($42,000), financing $378,000 with a 30-year fixed conventional loan. Current market interest rate through the builder's preferred lender is 6.75%.
During final negotiations, the builder gave us a choice between two incentives:
- Option A: Seller-paid 2-1 temporary buydown: The builder deposits funds into an escrow account so our effective note rate is:
- Year 1: 4.75% (saving ~$480/month)
- Year 2: 5.75% (saving ~$245/month)
- Year 3–30: 6.75% (full principal & interest of ~$2,453/month)
- Option B: $20,000 permanent purchase price reduction: Reduces purchase price to $400,000 (loan amount $360,000 at 6.75% for all 30 years, P&I of ~$2,335/month, saving ~$118/month permanently plus smaller down payment).
We have stable combined household take-home income of $7,600/month. We plan to live here at least 5–7 years.
Could you help us run a rigorous numerical audit of these two options:
- Total dollars saved over time: What is the cumulative cash flow comparison over 2 years, 5 years, and 7 years between Option A and Option B? At what month/year does Option B (price cut) mathematically surpass Option A?
- Payment shock and cash buffer: In Option A, our payment jumps by ~$235 in Year 2 and another ~$245 in Year 3 (total +$480/mo increase). How should middle-class buyers stress-test whether they can absorb this payment shock if wage growth doesn't materialize or if refinancing isn't viable?
- Escrow refund if refinancing: If interest rates happen to fall in 14 months and we refinance into a 5.5% fixed loan, what happens to the remaining unused seller buydown subsidy sitting in the escrow account?
- Secondary financial benefits: Does Option B provide lower property tax assessments or lower homeowner's insurance compared to Option A?
Answer
I'll work through this rigorously. Let me first see what calculation tools are available for mortgage-style math.
Let me write a Decimal-precise amortization comparison (this skill forbids float math, and no built-in mortgage script exists, so I'll use the skill's `money_dec` Decimal helpers).
The model uses your stated P&I figures and the $2,000 closing-side cash gap (Option A needs $42,000 down vs B's $40,000). All numbers from this turn's `mortgage_compare.py` (Decimal, USD scale 2). Output is a model with monthly compounding P&I, not a prediction.
1. Cumulative cash flow & break-even
| Month | Year | Cum A (P&I) | Cum B (P&I) | A − B (total cash out) | Cheaper |
|---|---|---|---|---|---|
| 12 | 1 | $23,676 | $28,020 | −$2,344 | A |
| 24 | 2 | $50,172 | $56,040 | −$3,868 | A |
| 36 | 3 | $79,608 | $84,060 | −$2,452 | A |
| 48 | 4 | $109,044 | $112,080 | −$1,036 | A |
| 60 | 5 | $138,480 | $140,100 | +$380 | B |
| 72 | 6 | $167,916 | $168,120 | +$1,796 | B |
| 84 | 7 | $197,352 | $196,140 | +$3,212 | B |
| The emergency number here was not verified for where you are — dial your local emergency number, or tell me which country you are in and I will look it up. | 10 | $285,660 | $280,200 | +$7,460 | B |
At your checkpoints (excluding property tax, insurance, PMI):
- 2 yr: A wins by $3,868 (lower cumulative cash out)
- 5 yr: B wins by $380 (essentially a tie)
- 7 yr: B wins by $3,212
Break-even: between month 56 and month 57 — roughly Year 5, month 8–9 of ownership. After that, B runs $118/mo cheaper in P&I, and that gap widens linearly with every additional month you stay.
2. Stress-testing the Year 2 / Year 3 payment shock (Option A)
P&I as a share of your $7,600 take-home:
| Phase | P&I | % of take-home |
|---|---|---|
| Option A, Year 1 (buydown) | $1,973 | 26.0% |
| Option A, Year 2 (buydown) | $2,208 | 29.1% |
| Option A, Year 3+ (full) | $2,453 | 32.3% |
| Option B (steady) | $2,335 | 30.7% |
Three checks worth running before you sign Option A:
- Full PITI test. Add property tax + homeowner's insurance + PMI to P&I. Conventional lenders want PITI ≤28–32% of *gross* income; on *take-home* of $7,600, the cushion is tighter. At a 1.1% effective property tax rate (national avg), $420K assessed = ~$385/mo tax; $400K assessed = ~$367/mo. So B's all-in is a touch lower even ignoring P&I.
- Income shock. If one earner loses their job for 3 months, can you cover 3 × $2,453 = ~$7,360 of P&I from savings (plus normal living costs)?
- Refi feasibility at the Year 2 mark. Your builder's6.75% would need to drop ~125 bps to 5.5% for the refi to actually beat staying put. If rates are flat or higher, the Year 3 jump lands.
If any of these three fails, Option A is the wrong shape.
3. Buydown escrow on a 14-month refi
At month 14: Year 1 subsidy fully used (12/12 months), Year 2 subsidy 10/12 unused. Disposition depends entirely on the buydown agreement — this pack does not hold your contract language. Typical builder2-1 provisions, in rough order of frequency:
- Forfeit to lender — most common when the builder's own affiliate writes both the buydown and the loan.
- Applied as principal reduction on the new loan — usually requires re-underwriting and the new lender's acceptance.
- Refund to borrower — rarer; usually only when the buydown is structured as a borrower-funded escrow rather than a true seller credit.
What to read in the agreement: the "buydown subsidy," "prepayment," and "refinance" clauses — specifically the words "non-refundable," "subject to lender approval," or "shall be applied to." If those words appear, the unused ~10 months of Year 2 subsidy (≈ $118/mo × 10 ≈ $1,180 nominal, undiscounted) likely walks.
4. Property tax & insurance (your Q4)
- Property tax: assessed value tracks purchase price. B at $400K vs A at $420K → B's annual tax bill is lower by $20,000 × local rate. Reference rates (effective, not headline):
- 0.6% (e.g. Hawaii) → ~$120/yr
- 1.1% (national avg) → ~$220/yr (~$18/mo)
- 2.0% (e.g. Texas, parts of NJ/IL) → ~$400/yr
Your county assessor's effective rate is what binds. This pack does not carry a specific jurisdiction's rate — check the county or state DOI page for the mill rate applied to your parcel.
- Homeowner's insurance: tied to replacement cost, not market value or purchase price. Same house under either option → roughly equal premium (small variation possible from dwelling-vs-land allocation, but immaterial).
- Title insurance (one-time at close): lower with B, because premium is calculated on purchase price.
What each route buys
- Option A buys ~2 years of cash-flow breathing room ($362/mo saved in Year 1, $127/mo in Year 2). It also *uses* the $480/mo Year-3 jump as the price of that breathing room.
- Option B buys a permanently lower payment ($118/mo less than A's full rate, every year), a smaller loan ($378K → $360K), $2,000 less cash at close, slightly lower property tax, and slightly lower title insurance. The trade is paying more in Years 1–2.
If you move before Year 5 (relocation, life event, job change), A wins on cumulative cash out. If you stay past Year 5, B wins by an expanding margin. The deciding question is not the math — it's your honest probability of staying ≥ 5 years and your tolerance for the Year 3 step-up if rates don't fall.