Mortgage Savings Strategy: Seller Paid Discount Points

Mortgage Savings Strategy: Seller Paid Discount Points

One great way to reduce your monthly house payment is to get your seller to make a seller concession of paying discount points, thereby reducing your interest rate, and as a result, your monthly mortgage payment.

Here’s this mortgage savings strategy in a nutshell:

When purchasing a home ask the seller to make the seller’s concession of paying discount points on your mortgage. Discount points are extra money paid at closing in exchange for a lower interest rate on your mortgage. This:

• Reduces your mortgage interest rate, resulting in a lower house payment
• Can be an attractive negotiating point, especially if the house has been on the market for a while and the seller is considering reducing their offering price.

Let’s talk about this in detail so you understand how this works and the negotiation strategies you can use to make this work for you.

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VIDEO: Everybody Wins With Seller Paid Discount Points

Josh Lewis and Scott Schang discuss how Everybody Wins with Seller Paid Discount Points

Seller Concessions

Seller concessions is a general term for the seller paying part of your closing costs when you purchase a home or other property. They’re good because they reduce how much you have to pay to get your loan, potentially saving you thousands of dollars at closing.

One of the seller concessions they can pay is discount points, but they can also pay other costs you would normally be responsible for including

• Appraisal fees
• Credit report fees
• Title insurance
• Property taxes
• Inspection fees
• Attorney fees
• Lender origination fees

Let’s drill deeper into the subject of this article: discount points.

What Are Discount Points On A Mortgage?

Discount points are a one-time fee paid at closing (when you buy your home) to reduce the interest rate on your mortgage for the life of your loan.

Essentially what you’re doing when you pay discount points is prepaying interest on a portion of your loan. As a result, you get a reduced interest rate, which translates into a lower house payment each month for the length of your loan.

Each discount point will reduce your interest rate by one-eighth to one-quarter of a percentage point and will cost 1% of your loan amount.

Here’s an example: let’s say that you will be getting a 30-year mortgage loan for $250,000. The lender is offering you a 5.5% interest rate on that loan, with each discount point reducing your interest rate by 0.25%. 

Remember that each discount point costs you 1% of your loan amount, which in this case would be $250,000 * 0.01 = $2,500 per point.

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Let’s say you decided to pay for 2 points. The total cost for those points would be $5,000, and your interest rate would drop from 5.5% to 5.0%. What would be the effect on your mortgage?

Your monthly mortgage payment would drop by $77.42 per month. You would break even on the deal (pay back that $5,000, so every month after that is real savings on your loan) in 65 months, but if you stayed in that home (and didn’t refinance the loan) for the full 30 years of your loan, your total savings would come to an astounding total of $27,871.20! (For a $5,000 payment, not bad!)

But what if, instead of you paying for those discount points, you got your seller to pay them?

Seller Paid Discount Points

Seller-paid discount points mean that, rather than paying the discount points yourself, you negotiate having the seller pay them for you instead.

You need to make this part of your initial offer on the house for it to be valid.

This kind of strategy probably won’t work in a hot real estate market where houses are selling within hours at prices above their offering price. But that’s not the normal situation in the world of real estate, especially in times of high-interest rates. So here’s a negotiating strategy that could work for you in a high-interest rate environment:

The Effect Of A Price Reduction When Selling A Home

Selling a home is a stressful time, especially in a less than hot real estate market. As a seller, you don’t do it very often, and you never know whether the price you are asking for is too high, too low, or just right.

Many sellers guess wrong and put their house on the market, only to find it sitting there for months with no acceptable offers. That’s where the mind games start. Should they reduce the price or hold out for the perfect offer?

It’s a catch-22: the longer the house stays on the market, the less likely someone will be willing to pay the asking price.

But, more importantly, if they reduce the price, what tends to happen is that this signals desperation and all the offers they get after a price reduction will tend to be significantly less than their reduced price. Savvy sellers recognize that reducing the price of their house will probably result in their losing even more money than the amount of that reduction.

A Buyer’s Negotiation Strategy

Now, let’s imagine that you would like to buy a house that’s been on the market for several weeks/months without an acceptable offer. You suspect the buyer is considering reducing their price from $400,000 to $375,000. You, and they, both know that if they make that drop, their house will likely sell for $370,000 or less. You’re able to make a 10% down payment on that property.

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So, you go to them with an offer that looks like this: 

“We suspect that you’re considering dropping your price, which probably means your house will actually sell for around $370,000, so we’d like to give you a win-win offer.

We will offer you $400,000 today on the condition that you pay $21,600 in discount points. You’ll make about $8,400 more than you would otherwise, and we’ll have a more affordable house payment.”

Let’s compare the impact on your monthly mortgage payment of the two options – their accepting your offer of $400,000 with $21,600 in discount points versus your waiting for them to drop the price and hopefully paying only $370,000 with no discount points.

*Not including taxes, insurance and PMI

Yes, you “pay more for the house” but you really don’t, because your monthly payment is actually $172.04 lower every month for 30 years. For every year you live there, without refinancing your loan, you will save $2,064.48. Over 30 years, your savings would be $61,934.40!

As I said, it’s a win-win.

But, you say, I paid $3,000 more in down payment. Yes, but your $172 in mortgage savings will pay off that difference in less than 18 months.

And, If you wanted to be a little more aggressive and only offer them $390,000 with them paying $21,060 in discount points, your savings would be even greater when compared to just offering them $370,000:

*Not including taxes, insurance, and PMI

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Maximum Seller Concession Amounts

You may have wondered how we came up with the weird numbers of $21,600 and $21,060 in the examples above. We assumed 6% of the loan amounts in each case.

That’s because standard FHA and conventional loans limit the amount that sellers can pay in seller concessions. 

The FHA limit is 6% – meaning the maximum amount of seller concessions a seller can pay is 6% of the loan amount. 

Conventional loan seller concession limits are based on the amount of downpayment you make

• Less than 10% downpayment – the seller concession limit is 3%
• 10% – 25% – the seller concession limit is 6%
• Greater than 25% – the seller concession limit is 9%
• (BTW, for investment homes the seller concession limit is 2%)

The seller concession limit for VA loans is 4%.

Are Seller Concessions A Good Idea?

If you’re the buyer, they can be an excellent idea – if you can get the seller to agree to them. Every dollar they agree to cover reduces your closing costs or may be used to buy additional discount points. 

For sellers, they may not be. They are actual reductions in how much they will be paid in the end, so they should be considered carefully.

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