Maximizing Seller Paid Closing Costs

Sean Trombetti

Welcome back to another episode of the Reliant Mortgage Solutions Podcast. I am Sean, and as always I'm here with James to talk all things mortgage and home ownership. Today we are going over seller paid closing costs and the best way to spend it, whether that is a price reduction, a traditional buydown, or a temporary 2 to 1 buydown.

James Eveld

And this connects to something we touched on in our episode about FICO versus VantageScore, where we talked about a lender paid temporary buydown, the one year version. Today we're taking that idea and asking what happens when the money comes from the seller, and how that stacks up against just asking for a lower price.

Sean Trombetti

Because most buyers go straight to price. A lower price means borrowing less, and that makes sense. But it may not be the move that does the most for your monthly payment. So let's use one example and keep the seller's cost the same for all three options.

James Eveld

Here's the setup. A $500,000 home, 10% down, so $50,000 down and a $450,000 loan. It's a 30 year fixed conventional loan at 6.75%, with a 7.120% APR. Principal and interest comes out to about $2,919 a month. Now say the seller agrees to give up $10,367 in proceeds to make the deal work. That number stays fixed. The only question is how we spend it.

Sean Trombetti

Option one is the straightforward one. Take ten thousand three hundred and sixty seven off the price. The new price is four hundred eitghy nine thousand six hundred and thirty three. With 10% down, your down payment drops slightly, so you keep roughly $1,000 in your pocket at closing. Your loan balance is marginally reduced, so the payment falls to about two thousand eight hundred and fifty eight.

James Eveld

So that's $61 a month in savings. And I don't want to brush past the good parts. You borrow less, you put less down, and that lower balance stays with you for the life of the loan. Those are real, lasting benefits. But $61 a month is the smallest payment relief of the three.

Sean Trombetti

Right. Option two, same seller dollars, but now they pay discount points to permanently lower your rate. In the example, the discounted rate comes down to 6.17%, and the payment drops to about two thousand seven hundred and forty seven dollars.

James Eveld

That's $172 a month, every month, for as long as you keep that loan. Compare it to the price cut: $172 versus $61 is about 2.8 times the monthly savings, for essentially the same seller cost. And I'd flag that 6.17% is an illustrative rate. Real pricing depends on the day and the loan, so treat it as an example, not a quote.

Sean Trombetti

Good point. Now the third one, which is the one that probably surprises people the most.

Sean Trombetti

The 2 to 1 temporary buydown. Here the ten thousand three hundred and sixty seven dollar buydown goes into an escrow account that subsidizes your payment for the first 24 months. Your actual note rate stays at 6.75% Still a seven point one two zero% APR. But in year one, you pay as if the rate were 4.75%, which is two points lower. In year two, you pay as if it were 5.75% - one point lower.

James Eveld

So in year one, principal and interest is about $2,347. That's $572 a month below the original $2,919. In year two it steps up to about $2,626, still around $293 a month below the original. Then in year three, the subsidy is gone and you pay the full $2,919 for the rest of the loan.

Sean Trombetti

Put those side by side, looking only at the first year. The 2 to 1 saves five hundred and seventy two dollars a month. The permanent buydown saves one hundred and seventy two. The price cut saves $61. So the 2 - 1 is about 3.3 times the permanent buydown, and about 9.4 times the price reduction.

James Eveld

Nine times. Same seller dollars. That's the part that makes people sit up. And I'd add a little math of our own, which is not in the source but is simple arithmetic. $572 times twelve is about $6,864, and $293 times twelve is about $3,516. Add those and you accentually land at the $10,367 the seller put in. The money is being paid out to you in the first two years, rather than spread thin across thirty.

Sean Trombetti

And that's the real tradeoff. The permanent buydown spreads the benefit across the life of the loan. The 2 to 1 front loads it. Think about what the first year of a home costs. Moving costs, repairs, furnishing, building up some reserves. An extra $572 a month during that stretch can be a big deal.

James Eveld

But here's what I always want buyers to hear clearly. You have to qualify at the full note rate, 6.75%, not the 4.75% or 5.75% you're paying early on. And you should be comfortable with the $2,919 payment in year three.

Sean Trombetti

Agreed. So who fits where? If you want the smallest loan balance, a price reduction makes sense. It also helps if lowering your loan amount matters more to you than monthly cash flow.

James Eveld

If you plan to keep the mortgage for many years and you won't be refinancing, the permanent buydown rewards that patience. That $172 keeps showing up month after month. And if the goal is making the first two years manageable, the 2 to 1 stretches those seller dollars furthest in terms of monthly relief.

Sean Trombetti

So the question isn't which option is best in general. It's what you need the money to do. Before you negotiate only on price, ask what the same seller dollars could do for your monthly payment. The lowest price isn't always the best deal. Sometimes the best deal is the one built around your actual priorities.

James Eveld

And talk to your loan officer before you write the offer, so you know which of these structures your loan and your contract can support. Thanks for listening to the Reliant Mortgage Solutions Podcast.