Reduced price or seller concession

Many buyers need a seller concession to help with closing costs and down payment funds, especially in todays market with no more "no downpayment" loans available. 

Those buyers that do not need the money for closing costs... those putting 10% or 20% down or more, will typically try to negotiate the price of the home lower.  Especially in todays "buyer market". 

What these buyers should consider, eventhough it's not needed, (and this applies to almost every price range), the buyer should still strongly consider a seller concession opposed to an equal price reduction. 

Let me try and explain, quickly. 

Let's consider the following home purchase financing plans:

Buyer 1:  This is Mr. ReducePrice, he is purchasing a home for $200,000. and planning on putting 20% down payment and borrowing $160,000.  With his Realtor helping, he negotiates back and forth and buyer and seller agree on a price of $196,000.  With 20% down payment, the buyer will finance $156,800. and rates are at 6% with 0 points, he has a new P+I payment of $940./month. 

Buyer 2: Miss IworkwithaMortgagePlanner, negotiates for the same home and buys it at $200,000. and a $4000. seller concession.  Same price to the seller.  Miss IworkwithaMortgagePlanner finances $160,000. mortgage, but uses the seller concession to cover the cost of 2 points.  The 2 points will help her to lower the going rate from 6% with 0 points to 5.5% with 2 points, but the seller is paying the 2 points (2% of the mortgage, which equals $3,200.)  Her P+I payment is $908./month.  That is $32. less per month than Mr. ReducePrice.  Savings #1 is lower payment.   

We're not done yet.  MissIworkwithaMortgagePlanner has only spent #3,200. of her $4,000. concession, leaving her $800. to cover some of her mortgage fees (appraisal, credit, processing...).  Yup, not only does she get a lower payment, she gets Savings #2, lower closing costs." 

Over a 6 year period, Miss IworkwithaMortgagePlanner will save over $3,500. in interest costs compared to Mr. ReducePrice.  If Miss I., takes her $32. per month in payment savings and sends it to principal reduction each month, she will save over $4,000. more than Mr. R. and have a lower loan balance.  So if they sold at the same time, she would walk from the table with a larger net check!  Savings #3, less interest costs and building more equity thru principal reduction. 

Let's go one more step, because the savings aren't over yet.  $3,200. went towards points, paid by the seller.  BUT... the buyer still gets the tax deduction of the points paid!  If she is in a 29% marginal tax bracket, she will receive a tax refund of almost another $1,000., Savings #$) from the points that she didn't pay!

So, next time you are buying a home or if you are a Realtor and are helping your clients to buy a home, think seriously about a seller concession instead of a price reduction. 

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This is the type of thinking and "mortgage planning" home buyers should be receiving.  Find a Certified Mortgage Planner for assistance and find more ways to help buyers in todays market.

Ken Pederson is a Certified Mortgage Planner and has earned the Certified Mortgage Planning Specialist designation.  He is also the branch manager for FAIRWAY Independent Mortgage Corp. in Lancaster, PA.
Ken can be reached at 717-431-9299.

A mortgage isn't just a mortgage anymore.  It's a tool to be used and incorporated into your overall financial plan to help you improve your financial health and accumulate wealth.