“Seller-paid points” are where you pay points to reduce the interest rate on the buyer’s mortgage. One point = 1% of the loan amount paid upfront to the buyer’s mortgage lender at the closing, in exchange for a lower interest rate on the buyer’s mortgage.
Consider a home where the list price is $300,000 and you are willing to accept a bottom line of $291,000. You would need reduce the price by $9,000. However, what if you take that $9,000 and apply it toward paying points on the buyer’s mortgage instead of reducing your list price? You’d still walk away with a net of $291,000. However, there are three extra benefits to you in this scenario.
#1 – YOUR HOUSE BECOMES MORE AFFORDABLE TO A WIDER POOL OF BUYERS
Paying points on behalf of the buyer can have almost 3 times the impact on the buyer’s purchasing power vs. reducing your list price. This is because most buyers use mortgage financing. The buyer’s mortgage interest rate would likely be 0.5% – 0.75% lower if you use the $9,000 to pay points on his/her behalf. In our example, you’d have to reduce the price of your $300,000 home to approx. $280,000 in order to achieve the same monthly payment for the buyer. This means your $9,000 in seller-paid points would end up having a $20,000 impact on the buyer’s purchasing power and make your home more affordable to a wider pool of buyers.
#2 – YOU REDUCE YOUR RISK OF THE DEAL FALLING THROUGH
If you pay points on the behalf of the buyer, the buyer would walk away with:
- A lower APR on his/her mortgage; and,
- A lower debt-to-income (DTI) ratio because of the lower monthly payments
These two things make it easier for the buyer to qualify for a mortgage. The benefit to you is that you have less risk of the deal falling through because you’re making it easier for the buyer to qualify for financing.
#3 – YOU GAIN A COMPETITIVE ADVANTAGE VS. OTHER HOMES LISTED FOR SALE
Seller-paid points save you the aggravation and financial loss of having to significantly reduce your list price in order to compete with other homes that may be listed for a lower price. In our example with the $300,000 list price, you’d need to take a $20,000 hit to compete with homes in the $280,000 price range. On the other hand, with seller paid points, you’d only need to take a $9,000 hit to compete with homes in the $280,000 price range.
So there you have it! Let me know if you’d like for me to run some numbers to see the impact that seller-paid points might make in your situation.