As home prices and interest rates have climbed, many large builders have rolled out aggressive incentives to keep sales flowing, including eye-catching mortgage offers like 0.99% first-year rates or 30-year loans well below market norms.

At first glance, these deals look like a win for buyers struggling with affordability. But emerging data shows a different story: while the monthly payment may look appealing, the structure behind these “cheap mortgage” deals can leave buyers overpaying for their homes, and in some cases, underwater shortly after moving in.

Why Builders Offer Ultra-Low Mortgage Rates

Instead of lowering the purchase price, big builders often use permanent or temporary rate buydowns to advertise below-market rates.

They do this using bulk loan agreements called “forward commitments.” By securing favorable rates in advance, builders can pass cheaper financing to buyers, all while keeping the official sales price high.

Why does this matter? Because builders don’t want to cut prices.

A lower sales price can create:

Negative comps that reduce the appraised value of other homes in the same community
Pressure to lower prices across remaining inventory
The appearance of softening demand

A rate buydown solves this for them: they get the sale, protect pricing power, and still offer buyers a lower monthly payment.

The Hidden Trade-Off: Buyers May Be Overpaying

The trade-off comes down to value. When a builder inflates the price but cushions the payment with a discounted rate, buyers may not realize they're paying more than the home would cost without the financing gimmick.

Homes from the biggest national builders rose in price significantly more (2019–2024) than those from smaller builders or existing homes.

Much of that premium appears to stem from mortgage incentives rather than actual market value.

The cheap rate doesn’t make the house a better deal. It just hides the higher price.

The Result: More Buyers Ending Up Underwater

As the market cools or normalizes, that inflated price can put buyers in a tough spot. Several analyses show that builder-financed loans have unusually high rates of negative equity (owing more than the home is worth).

That means thousands of recent buyers are now in homes that appraise for less than their loan balance — often within 12 to 24 months of purchase.

Why This Is a Problem for Buyers

Negative equity can limit a homeowner’s options:

You can’t sell without bringing cash to closing.
You can’t easily refinance, even if rates drop later.
You may not qualify for HELOCs or cash-out refinancing.
Moving for a job becomes financially difficult or impossible.

For FHA buyers, who may have put down very little, even small price corrections can lead to quick and painful underwater positions.

Are Builder Rate Buydowns Ever a Good Deal?

They can be, but only when buyers evaluate the total cost, not just the monthly payment. A buydown might be worth considering if:

The price of the home matches surrounding comparable sales
The incentive reduces interest for a meaningful period (not just a one-year teaser)
The buyer plans to stay in the home long enough to benefit
The buyer is putting enough down to protect their equity position

The key is making sure the builder’s “cheap rate” hasn’t simply been added into the sales price.

Smart Steps for Buyers Considering Builder Financing

Before accepting a builder’s low-rate offer:

1. Get an independent lender quote.

If their price is lower but the payment is higher, that’s a red flag.

2. Request a full cost breakdown.

Including: rate buydown costs, fees, and how long the rate is reduced.

3. Look closely at comparable sales.

Are similar homes without incentives selling for less?

4. Consider long-term equity, not just the first-year payment.

A 0.99% teaser rate doesn’t matter if the home loses value.

5. Protect yourself with a realistic appraisal.

You can request your own independent appraisal before closing.

Bottom Line: Great Monthly Payment ≠ Great Deal

Builder mortgage incentives can absolutely help make a payment more affordable, but they can also mask an inflated home price. With negative-equity rates rising sharply among builder-financed FHA loans, buyers should approach “too-good-to-be-true” rates with caution.

A lower payment feels great today.

Strong equity feels better tomorrow.

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Are Builders’ “Cheap Mortgage Rates” a Good Deal?