I recently contracted to purchase a new-build home with a very large national builder. They have a prepayment option that allows me to pay from $50,000 up to about 95% of the final home cost. If I make that prepayment 120 days or more prior to closing, the builder gives me a credit of 1.5% of the amount paid. This is an APR of roughly 6% and it's not taxable. If I paid the largest amount allowable my credit would be about $6,500. I currently hold those funds in a S/T Treasury bond fund (which has been losing money) and a savings account (which pays .5% APR).
So the question regards the risk/reward of participating in this program. The reward is an obvious $6,500 tax free. The risks are, 1. the funds are not insured, i.e., if the builder goes bankrupt (which I'm not too concerned about), and 2. I lose leverage at/around closing should there be problems, since they already have my money. Regarding the latter, it is concerning since the new home build process is a difficult situation currently, with lack of quality construction labor and the unusually high volume of homes the builder is selling - double the pre-pandemic rate. Contractually, the builder can charge me $250/day if I don't close on the date they schedule, so I'm not sure I could refuse to close based on construction issues.
Any opinions are welcome. Thanks.
So the question regards the risk/reward of participating in this program. The reward is an obvious $6,500 tax free. The risks are, 1. the funds are not insured, i.e., if the builder goes bankrupt (which I'm not too concerned about), and 2. I lose leverage at/around closing should there be problems, since they already have my money. Regarding the latter, it is concerning since the new home build process is a difficult situation currently, with lack of quality construction labor and the unusually high volume of homes the builder is selling - double the pre-pandemic rate. Contractually, the builder can charge me $250/day if I don't close on the date they schedule, so I'm not sure I could refuse to close based on construction issues.
Any opinions are welcome. Thanks.