We talked previously about using a seller concession to pay for closing costs. It is a great way to save money or to find money to complete a transaction. There is another thing you can use this concession for. You can buy down the interest rate.
How does this work? Remember in the earlier post on seller concession we talked about the different amounts available based on your down payment? These same funds can be used to pay points that will reduce your interest rate.
In that example we showed that on a $300,000 purchase with a 10% ($30,000) down payment we qualified for an $18,000 seller concession. We had $11,000 in closing costs and escrows. There is $7,000 available for us to use. We could use this $7,000 to buy discount points and buy down the interest rate.
Since we will be borrowing $270,000 each point will cost us $2,700. Take $7,000 and divide it by $2,700 and you get 2.5 points. In a conforming loan this will usually buy down the rate by .625% to .75%. Let's compare.
Points 0 Points 2.5 Points
Interest Rate 6.25% (6.389% APR) 5.625% (6.42% APR)
Loan Amount $270,000 $270,000
Monthly Payment (P&I) $1,662.44 $1,554.27
Interest Cost over Loan Life $328,477.12 $289,538.03
There are some real benefits here. Look at the difference. You will reduce your monthly payment by $108.17. This would save you$1,298.04 per year and $38,941.20 over the life of the loan. Not bad, but there's more. Since you are reducing your interest rate you will be paying less interest over the life of the loan. If you take the loan to term you will save another $38,939.09. In total you would have saved $77,880.29. You know what is even better...you did it with the sellers money.
These opportunities exist in many transactions, but not all of them. You need to discuss these options with your loan officer and your real estate agent. The best way to be prepared for these opportunities is to make sure you are pre-qualified and are ready to move on the property.
Please let me know if you have any questions. You can email your questions to me at KlassenMortgage@hvc.rr.com. I'll be happy to answer them.