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.
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Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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