The builder’s lender is offering you a $5,000 rebate but has not specified the interest rate. Since a rate of 4.625 percent commands a rebate of $6,100 in the market, if offered by the builder’s lender, that rate would be $1,100 above the market. In a similar fashion, 4.5 percent would be $200 above the market, 4.375 percent would be $2,400 below the market, 4.25 percent would be $4,300 below the market, and 4.125 percent would be $6,300 below the market. If these were the actual numbers in your case, you should receive a rate of 4.25 percent, and certainly no higher than 4.375 percent.
If you accept a mortgage from the builder’s lender, you would have total rebates of $15,666, which could be more than you need to pay all settlement costs including the funding of your escrow account. The excess should not be left on the table because you can use it to reduce the interest rate.
Assume the rate offered you with the $5,000 rebate is 4.25 percent. Based on market quotes, you should be able to “buy down” the rate to 4 percent by giving up the rebate. But this kind of arrangement has to be worked out beforehand. If they won’t allow you to buy down the rate, their offer of a rebate is bogus.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2014 Jack Guttentag
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