Seller-Paid Points

The result of seller points is to reduce the interest rate on a mortgage loan. Not your mortgage loan; in this scenario, you're the seller. Instead, you pay a lump sum in order to reduce the overall interest rate for the loan.

A point equals one percentage point of interest rate. So reducing a loan's interest rate from 4% to 3% equates to one point. The amount paid depends on the situation, but the process involves forking over a lump sum to get a lower lending rate for the buyer. The cash comes out of the sales price. So if you sell your house for $350,000 and include $10,000 to buy a point for the buyer, you receive $340,000 from the sale (minus any other expenses or encumbrances).

But...why would you do this? Why would you give up cash in order to help out the buyer? Just to be nice?

Well, not quite. Seller points become bargaining chips in negotiations. It makes the house more affordable for the buyers. The process has the same basic affect of lowering the asking price for the house. However, the impact on the buyer can be much more significant than the amount of cash you have to give up.

You spend $10,000 on a $350,000 in order to lower the interest rate from 4% to 3%. Depending on the way the mortgage is structured, that could save the buyer tens of thousands of dollars over the course of the loan. More importantly, it significantly lowers their monthly payment...a reduction well below what would have been achieved simply by lowering the purchase price from $350,000 to $340,000.

So, as a matter of negotiation, it has more bang for the buck. You're asking $350,000. The buyer only wants to pay $325,000. By buying points with $10,000, you can get them a monthly payment closer to what they would have had if they had gotten a $325,000 house...but you still get $340,000 from the sale (after the point-buying amount comes out).

Seller points thus become a more efficient way to grant value to the buyer in a negotiation, letting you ultimately sell your house at a higher price than the buyer might otherwise have been willing to accept.