Which Has More Value, A Price Reduction Or Seller Paid Concession?

When looking to purchase a home with a Fort Lauderdale mortgage, is it more advantageous to the buyer to seek a price reduction in the home or to pay more and receive a seller paid concession?  As a Fort Lauderdale mortgage broker, I’m always surprised this question is not only asked more frequently, but hardly considered at all by most Fort Lauderdale Realtors or their buyers.

Most transactions that include seller paid incentives are typically used to pay buyer’s closing costs.  The most effective use of seller paid concessions is actually using the incentives to lower the buyer’s interest rate.  A Fort Lauderdale mortgage structured with the seller paying points to lower the buyer’s interest rate will greatly out-perform a similar price reduction on the property.

This point is best illustrated by examining an actual case study I recently evaluated for a potential prospect.  It involved the purchase of a Fort Lauderdale foreclosure financed with a Conventional Fort Lauderdale mortgage.  The asking price of the property was $400,000.  The buyer wanted to evaluate whether he would be better served to offer the asking price of $400,000 and request a 3% seller concession, or lower his offer to $388,000 with no concession?

The table below will illustrate the comparison of lowering the offer price by 3% or $12,000 vs. using the $12,000 to buy down the interest rate on a 30 year fixed rate Fort Lauderdale mortgage. Column 1 shows paying asking price with 3% incentive and making required monthly payment ($1574.21).  Column 2 shows paying asking price with 3% incentive and prepaying the $68.45 savings every month (same payment as price reduction).  Column 3 shows reducing the offer price by 3% ($12,000) and receiving no seller incentive.  The results are as follows:

List Price–no prepayment List Price–with prepayment Price Reduction

Sales price                   $400,000                                 $400,000                                          $388,000

Loan Amount              $320,000                                 $320,000                                          $310,400

Interest Rate                   4.25%                                           4.25%                                                  4.875%

Payment                            $1574.21                                 $1574.21                                           $1642.66

Payment Savings              $68.45                                         $68.45                                                    $0

Total Payments                $566,713                                      $566,713                                        $591,359

Total Interest                    $246,713                                      $224,209                                       $280,959

Interest Savings                  $34,246                                        $56,750                                                $0

The results of this case study show that it is clearly more advantageous for a buyer using a Fort Lauderdale mortgage to seek a seller concession vs. a price reduction when purchasing a home.  Paying $12,000 more for the home actually saved the buyer $34,246 in interest expense and $24,646 in total monthly payments using the normal amortization.  If the buyer re-invested the $68.45 monthly payment savings back into the mortgage, the interest savings increases to $56,750.

If that’s not convincing enough, then here’s the frosting on the cake.  A Fort Lauderdale mortgage using a seller paid concession to buy down the interest rate is considered by the IRS as prepaid interest.  As such, the buyer is eligible to deduct the points paid by the seller on their tax return.  Therefore, if the buyer is in a 28% tax rate, they have created an additional $3,360 tax break for themselves on top of the interest and payment savings.

Turbo-charge your Fort Lauderdale mortgage with a seller paid concession instead of seeking a price reduction.  As a professional Fort Lauderdale mortgage broker, I can show you how this strategy can save you money as a buyer or help you sell more homes as a Fort Lauderdale Realtor.

Call Harvey Collier at First Trust Mortgage today to see how much you can save by using this buyer strategy.