What should I do? floating interest rate on new construction

[West Kite]

I have a question. If a buyer is offered a 2-1 buydown (starting at 5.25%, increasing to 6.25% and then to 7.25%) with all closing costs covered except for $3,000 (to be paid by the buyer) on new construction through the seller's preferred lender, and signs the purchase contract in April 2024, the house will be completed by the end of September 2024. The buyer was informed that the interest rate will be floating because the construction completion date is further away (5 months) according to the preferred lender. They mentioned that the rate will be higher if locked for 5-6 months. Is this normal in lending? Would you leave it as a floating rate, hoping the rate goes down? Of course, no one knows for sure, but it seems the FED deferred interest rate decreased.

The location of the new construction is so appealing due to being close to downtown (10 minutes).

What would you do?

Thank you for your input in advance.

[Benjamin Aaker]

With this buydown you are really paying for knowledge of what your interest rate will do. In this case, the contractor is working with a bank to make it easy for the buyer to say 'yes'. That's not in itself a bad thing, but it might be a bad thing for the buyer. It probably means that the lender or contractor are paying for this particular buydown. This makes the initial loan amount look more attractive. It could fool someone into thinking that sweet 5.25 is a permanent rate.

The prospective buyer should compare the interest paid over the life of the loan. What does the buyer think that rates will do in the next 6 months? Last week we saw softening in the FED's stance of increasing rates. A 30 year fixed FHA rate is about 7% right now. Does the buyer think it will increase in 5 months? If not, it's best to wait until the house is built, pay the bridge loan, then finance when completed. If the buyer believes rates will go above 7.25% in the next 5 months, then they should go with the buydown.