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Things to Consider When Purchasing a Home

March 6, 2023

Things to Consider When Purchasing a Home

Daniel Thompson

Salt water Real Estate Realtor

For those of you who focus too much on negotiating the lowest price, here is something to consider during your next purchase…
 
When it comes to buying a home, one of the most important decisions you’ll make is how to negotiate the price. While most people focus on getting the lowest purchase price possible, there’s another option that can be even more beneficial: a seller’s credit. In this blog, we’ll compare a seller’s credit to lowering the purchase price, including information on the maximum amount of points you can buy down from a lender. We’ll also provide an example to show the difference between buying down points and lowering the purchase price.
 
What is a seller’s credit?
 
A seller’s credit is a sum of money that a home seller agrees to give to the buyer at closing. This credit can be used to pay for closing costs, points, or to reduce the purchase price. By offering a seller’s credit, the seller can make their home more attractive to potential buyers and close the sale more quickly.
 
Why is a seller’s credit more beneficial than lowering the purchase price?
 
While lowering the purchase price of a home can help reduce your monthly mortgage payments, using a seller’s credit to pay for points can be even more beneficial. Points are upfront fees that are paid to a lender to lower the interest rate on your mortgage. One point is equal to 1% of your loan amount, and it can lower your interest rate by up to 0.25%. By using a seller’s credit to pay for points, you can lower your interest rate and save money over the life of your loan.
 
What is the maximum amount of points you can buy down from a lender?
 
The maximum amount of points you can buy down from a lender depends on the lender’s policies and the type of loan you’re taking out. In general, most lenders will allow you to buy down up to 3 points, which can lower your interest rate by up to 0.75%. However, some lenders may allow you to buy down more points or offer a higher rate reduction for each point you buy.
 
Example: Buying down points vs. lowering the purchase price
 
Let’s say you’re buying a home with a sale price of $400,000 and you’re putting 10% down on a 30-year fixed-rate mortgage with an interest rate of 7%. Here’s how buying down points compares to lowering the purchase price:
 
Lowering the purchase price: If you negotiate the sale price down to $380,000, your monthly mortgage payment (excluding taxes and insurance) would be $2,355. Over the life of the loan, you would pay $845,947 in principal and interest.
Buying down points: If you use a seller’s credit of $10,000 to pay for points and buy down 3 points, your interest rate would be lowered to 6.25%. Your monthly mortgage payment would be $2,234, and over the life of the loan, you would pay $804,068 in principal and interest. This would result in a savings of $41,879 over the life of the loan compared to lowering the purchase price.
 
In this example, using a seller’s credit to buy down points results in a lower monthly mortgage payment and a significant savings over the life of the loan compared to lowering the purchase price.
 
While negotiating a lower purchase price for a home can be tempting, using a seller’s credit to buy down points can be even more beneficial. By using a seller’s credit to pay for points, you can lower your interest rate and save money over the life of your loan. However, it’s important to understand the maximum amount of points you can buy down and consider the upfront cost against the long-term savings to determine if it’s the right financial decision for your specific situation.
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