CMPS News Flash!!

Most home buyers today are looking for a great deal. In fact, there are plenty of deals to go around because it is estimated that over half of all homes being sold in many markets are distressed sales involving some form of foreclosure or pre-foreclosure sale. However, what if there was a way to save tens of thousands of dollars on your home purchase WITHOUT asking the seller for a huge reduction in price?

That's where seller-paid points come in. Points are upfront fees that are paid in order to reduce your mortgage interest rate. For example, "one point" is a one-time fee of 1% of your loan amount; "two points" is a one-time fee of 2% of your loan amount, and so on. In exchange for the upfront points paid to the mortgage company, they will reduce your mortgage interest rate for the entire life of the mortgage.

The great thing is that a home seller can pay points on behalf of a home buyer, and this will lower the buyer's long-term cost of owning that home.

Consider this example comparing seller-paid points (column #2) with simply asking the seller for a reduction in the sales price (column #1):

In this example, the buyer is looking for a 10% discount off the list price. In column #1, the buyer is getting their discount by trying to reduce the purchase price. In column #2, the buyer is getting their discount through seller-paid points and closing costs. As you can see, the seller in column #2 is paying 5 points and the buyer's closing costs. The bottom line here is that although it looks like the buyer is paying more for the house in column #2, they are actually paying much less. In fact, the buyer saves $74 in cash flow every single month for the next 30 years - that's a whopping $26,640 in monthly payment savings over the life of the mortgage. Even though the mortgage balance is higher in column #2, the Buyer saves $7,974 in interest costs over 5 years, $15,826 over 10 years, and $36,288 over the 30 year life of the mortgage!

To further add some sizzle to this scenario, remember that points are tax deductible to the buyer even if they are paid by the seller. In other words, the buyer in this example (column #2) would be able to take an additional $8,480 deduction on their tax returns in the year of the home purchase without spending a dime out of their own pocket! This means that a buyer in a 25% income tax bracket would experience an additional $2,120 in actual cash savings when they file their tax returns. Furthermore, points are also deductible to the seller by way of reducing their capital gain on the sale of the property (if they have a capital gain).

Although the scenario illustrated above involves a 20% down payment, this strategy can also be implemented in cases involving a 10% or even a 3.5% down payment - Fannie Mae allows 6% in seller-paid points and costs on loan programs up to 90% financing, and FHA also allows 6% on loan programs up to 96.5% financing. If you are a seller, you can use financing incentives like this to attract more buyers and make your listings stand out from the glut of inventory in today's market. Check with your mortgage, real estate, and financial professionals for more details on this and other beneficial strategies that may be available to you!