Seller-Paid Points

  

Categories: Mortgage, Real Estate

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.

Related or Semi-related Video

Finance: What is PMI insurance?0 Views

00:00

and finance Allah shmoop What is PM I insurance All

00:07

right people There's your car insurance your health insurance What's

00:10

that you say you're buying a house with less than

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20% of the home's value is a down payment Well

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guess what that means more insurance for you Yes private

00:19

mortgage insurance PM I accept the PM I isn't insurance

00:23

for you No it's insurance for your bank The interest

00:27

you pay on your mortgage is like interest you pay

00:29

on any other loan which is paying the lender for

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the service of getting money sooner rather than later you

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know via alone But since mortgages are so big while

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they're essentially big gambles for banks if you pay a

00:40

down payment of 20% or more on your house well

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the bank's trust that they'll get all their money back

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because he already paid 20% of the value of the

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house up front and the odds that the home goes

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down more than 20% in value and all that stuff

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in any kind of short term is pretty low right

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So But if you don't put down 20% like you

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know if your down payments 10% or 5% or something

01:01

like that Well then the banks will still let you

01:04

have your mortgage but only if you pay for private

01:07

mortgage insurance to cover the banks for taking on a

01:10

whole lot of risk on you Write so well go

01:13

through an example If someone pays 200 grand for a

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home and they put 20% down well they've paid $40,000

01:18

up front to the bank Then the bank creates alone

01:20

for the remaining 160 grand which the borrower pays off

01:23

over a 15 or maybe 30 years If all else

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goes smoothly since the buyer put 20% down they can

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skip the monthly PM I payments which is kind of

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a big deal right PM I can cost between 1/2

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a percent or 1% of the loan every year maybe

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more depending on you know how bad your credit is

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For instance if that same someone put 10% down instead

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of 20% on that same 200 grand home So that

01:44

means they put $20,000 down took out a mortgage of

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180 grand well since their down payment is less than

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20% of the house price They'll be stuck paying PM

01:52

I which will cost him somewhere around a grand or

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two a year plus taxes and yes PM My payments

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are not act deductible Unlike mortgage it's kind of ironic

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but having less money often cost you more money Yes

02:04

welcome to the real world people because well less money

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means more risk for the bank Well should something go

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awry and you can't make payments anymore well the bank

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has to then sell the house to try to regain

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the money from your defaulted loan And yes it's a

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bummer for you but well it's a bummer for your

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bank to they hate this Truth be told the bank

02:21

would rather not sell your house since that whole affair

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is a whole lot of trouble and cost them money

02:26

and grief and bad press The commission and lawyer costs

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and eviction Sheriff bumper cars you know families being evicted

02:34

all those expenses Yeah they add up This is where

02:36

pm I comes in Private mortgage insurance is insurance for

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your lenders In case you end up getting your house

02:42

foreclosed upon the PM I money You've been paying for

02:45

Your lender goes towards an insurance policy that helps your

02:47

lender recuperate the money they lend you especially if the

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house sells for less than what you originally borrowed Like

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you paid 200004th But you overpaid It really should've sold

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for 1 85 and then the market went down And

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then he had to pay a 6% commission to the

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Realtor And he's only paid two grand of your mortgage

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down And somehow after all the expenses the bank only

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got 146 grand in there $10,000 in the hole And

03:10

that's a big problem right So how do you avoid

03:12

paying PM I You know money that's just going down

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the tubes down the drain and into an insurance policy

03:17

to help your bank your lender a sleep better at

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night Well you put 20% down That's how but we'll

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say you can't afford to put 20% down or it's

03:26

too little too late You already put 10 or 15%

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down on you in that home You're stuck paying PM

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My number's right Well the good news is you can

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stop paying PM I eventually That is you Khun Stopping

03:35

PM I once you've paid off 20% of your home

03:39

or the value of your home is gone up enough

03:41

such that the bank believes that you actually have 20%

03:44

equity in the home as long as 20% of your

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house has yet to be paid for in cold hard

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cash while your bank will consider you in the danger

03:51

zone requiring PM I payments once you have 20% equity

03:54

in your house out right Well whether your initial down

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payment or not while you don't have to pay PM

03:59

eye anymore you know so long as you tell your

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lender right legally they have to stop charging UPM my

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payments Once you tap them on the shoulder and officially

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say Hey guys I have 20% equity in my house

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now So can you like not do it with the

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PM I charges anymore If you forget step them on

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the shoulder When you have that 20% inequity Well don't

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worry They legally have to stop charging you for PM

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I Once you get to 22% equity in your home

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if you put 10% down on that $200,000 house or

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20 grand and made monthly mortgage NPM my payments with

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some extra mortgage payments thrown in until you paid down

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another 20 grand Well now notionally At least you have

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$40,000 in equity or 20% equity in your home Time

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to call the bank and say science art of those

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PM I payments But if you don't if you don't

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tell him if you don't give him a legal notice

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well then you'll keep paying PM I along with your

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monthly mortgage payments you know kind of forever ish That

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is until you have 22% equity in the home which

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is when you've paid 24 grand incrementally in mortgage payments

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down right If you want to save money well better

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to tell your lender to get rid of that PM

04:57

I soon as you can If you put less than

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20% down in your house it's a race to reach

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that 20% equity so that you can stop making these

05:03

pesky PM I payments And besides just paying mohr than

05:06

you have to on your mortgage while for instance making

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a full extra mortgage payment every year which can save

05:10

you a surprising amount of the mortgage interest in the

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long run Just saying there are some other options too

05:16

If the housing market is hot in the value of

05:18

your house has gone up well you can get your

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house reappraised to show they have 20% equity in your

05:23

home just based on the down payment they already made

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and head back to your lender with that good news

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right So in this case if a homeowner put 20

05:30

grand down and took a loan for 180 grand on

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a $200,000 home purchase price and in five years they

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paid down the 180,000 they owed to being well just

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170 now and in that time period the home's value

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one from 200 grand to a new Zillow estimated market

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value of 250 grand then the easy math would let

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the home longer subtract $170,000 in mortgage from the $250,000

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Zillow price showing equity they had in their home of

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$80,000 Well 80 over 250 Yeah that's 32% of the

05:59

homes new value well over the 20% needed for PM

06:02

My insurance If the market's doing that well it's probably

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in the homeowners best interest to refinance at at that

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point in anyway because you probably get cheaper interest rates

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Another thing homeowners can do Besides you know praying to

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the housing gods for a favorable market is to take

06:14

their home into their own hands Literally renovated bathrooms and

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kitchens are too big ese that add significant value to

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a house especially if they were you know outdated When

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he about the house Ah homeowner can get toe work

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sprucing up their home then get it re appraise for

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a higher amount which will have the same effect as

06:29

if the housing market gods were favorable at the time

06:31

And the risk here of course is that if you

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live in a state where it's taxes are based on

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the appraised value of your home when you re appraise

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it at a higher value you risk the tax man

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coming by and raising your taxes So yeah have you

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got in for people Homeowners can do all three of

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these things make extra mortgage payments created the housing market

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gods for favorable market and replace that godawful sink in

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the kitchen that has a questionable permanent stain The sooner

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you get 20% equity while the sooner homeowners will free 00:06:58.868 --> [endTime] themselves of the shackles of PM I payments gloriously

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