Financing Solutions with David Reed
When $5,000 means almost $30,000
In the current market, sellers are often encouraged to make some sort of contribution to help sell a property, such as paying a portion of the buyer’s closing costs. In fact, I’ll wager that this tactic is the most common. “Seller to pay $5,000 of buyer’s closing costs!” the listing reads. But how do you stand out if such seller contributions are common in your market?
One way for your listing to rise above the competition is to translate that same $5,000 into nearly $30,000 by permanently buying down the buyer’s interest rate. Here’s how it works:
On a 30-year fixed-rate mortgage, one discount point (which equals one percent of the loan amount) will typically reduce the interest rate on that mortgage by a quarter of a percent. Two points will reduce the rate by half a percent, and so on.
Say the loan amount is $250,000, one point equals $2,500 and two points equals $5,000. A 6 percent rate means a monthly principal and interest payment of $1,499 while 5.50 percent (that’s after buying it down two points) yields $1,419 payment, or an $80 per month savings. Not much at first glance compared to paying for $5,000 worth of closing costs is it? But, the interest on the life of that loan is very significant.
At 6 percent, the buyer pays $289,640 in interest over the life of the loan. However, a 5.50 percent loan results in interest charges of $260,840; a $29,000 difference! Now, the buyer gets a $29,000 interest credit from the seller instead of $5,000 in closing fees.
Suddenly that same $5,000 stands out amongst the crowd of seller contributions. “Seller to buy down $29,000 in interest payments for the buyer!” $29,000 to the buyer and no additional expense to the seller; talk about a win-win!
Work with the lender and your team leader to make sure that you are marketing the buy down accurately and according to your local board’s marketing standards.
- NUMBER1EXPERT™ 
