What Are Seller-Paid Points?

The term "seller-paid points" refers to a concession or rebate offered by a seller to the buyer in a transaction. The points can lower the total interest paid by the buyer over the life of the loan. Seller-paid points are commonly found in real estate transactions and usually consist of a lump sum paid to the buyer's lender. The points help reduce the interest rate the buyer must pay on their mortgage, where one point is the equivalent ♎of 1% on🦩 the mortgage loan.

How Seller-Paid Points Works

澳洲幸运5官方开奖结果体彩网:Mortgage points represent a fee paid to lower the interest rate on a mortgage loan for the purchase price of a home. Mortgage points are also called discount points because they 澳洲幸运5官方开奖结果体彩网:can reduce the interest rate on a mortgage loan by a certain percentage.

Homebuyers sometimes purchase mortgage points to reduce the loan's interest rate and save on the total interest cost over the life of the loan. The fee for the mortgage points is paid at the loan's closing or when the mortgage lender signs the 澳洲幸运5官方开奖结果体彩网:documents. Although homebuyers usually buy mortgage points, sometimes a seller might offer to pay mortgaಌge points on behalf of the buyer to entice the buyer to purchase the home.

The amount of interest rate reduction for each point can vary between lenders, but usually, purchasing one mortgage point would lower the interest rate on🌊 a loan by 0.25%. In other words, a mortgage loan interest rate of 4% would be reduced to 3.75%.

Typically, one mortgage point costs 1% of the loan amount, meaning that it would cost $2,000 to buy one mortgage point for a $200,000 loan (0.01 * $200,000).

Seller-Paid Points vs. Seller Concessions

Seller concessions are when the seller of a home decides to pay some of the buyer's closing costs. A seller would do this to quickly sell the house and close the deal, particularly in a buyer's market.

Seller concessions can only be used towards the buyer's closing costs. They are not points that reduce the interest on the loan. Though the specific closing costs they can cover will vary on each loan, they typically cover origination fees, home inspection fees, appraisals, lawyer fees, title insurance, recording fees, and prepaid real estate taxes.

Seller Concession Limits

There are limits to how much a seller can contribute to closing costs. The limit for FHA and USDA loans is 6% of the loan amount. The limit is derived from the down payment amount for conventional loans provided by 澳洲幸运5官方开奖结果体彩网:Fannie Mae or Freddie Mac. If the down payment is 10% or less, the seller can only contribute 3%. For down payments between 10% and 25%, the limit is 6%, and for down payments above 25%, the limit is 9%. For an investment property, the max is 2%, and for VA loans, the max is 4%.

Special Considerations

You may be able to lower your tax burden as the buyer in a deal by using 澳洲幸运5官方开奖结果体彩网:deductions for mortgage interest and points. But certain requirements must be met before you can d༺o so.

You can deduct the mortgage interest paid only on the first $750,000 of your total debt. The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) does allow you to go beyond that limit—up to $1 million—only if you incurred your debt before Dec. 16, 2017.

The mortgage loan must be used to finance your primary residence. The points paid can't be for costs listed separately at the closing or on the settlement sheet. These costs include appraisal fees, title fees, inspection fees, attorney fees, and property taxes.

Finally, it must be an established practice in your local area for lenders to offer points. The points must be computed as a percentage of the loan's principal amount, and the amount must show clearly as points on your settlement statement for you to qualify for a deduction.

Benefits of Seller-Paid Points

Seller-paid point😼s offerꩵ benefits to both buyers and sellers alike.

Lower Interest Costs

Seller points reduce the interest rate a buyer pays to the lender on their mortgage. These points also increase a buyer’s down payment by reducing the price that's ultimately paid for the home since the borrower will pay less interest throughout the loan.

Seller poin💮ts could also be used to lower the monthly payment, helping the borrower afford the mortgage more easily. If a mortgage interest rate is reduced, the monthly payment iℱs usually reduced as well.

Tax Deduction

As mentioned above, seller-paid points also have tax advantages for the buyer. They can be deducted from the home buyer’s income taxes as mortgage interest. The IRS considers seller-paid points as prepaid interest or interest paid by the home buyer. Mortgage interest can be deducted from a homeowner's total taxable income when they file their taxes. As a result, seller points can also be deducted, reducing the buyer’s tax liability.

Sellers Can Sell Their Home Quickly

People who want to sell their homes quickly can entice buyers by sweetening the offer with seller-paid points. Seller points can be a more attractive option than a straight discount. Here's why.

Let's say you're selling your home, and it has a 澳洲幸运5官方开奖结果体彩网:list price of $300,000, but you are willing to accept an offer of $𝔍295,000. You could reduce the list price bꦺy $5,000, or you could strategically offer $5,000 in seller points instead.

You’d still end up with the same amount of money, but the buyer would likely be better off with the points versus the $5,000 discount. The points would come with a 澳洲幸运5官方开奖结果体彩网:tax deduction aꦑnd reduce the loan's interest rate, lowering the mortgage's total interest cost.

Negotiating Seller-Paid Points

It would be great to have points or 澳洲幸运5官方开奖结果体彩网:closing costs paid by the seller when you're buying a house as you'll save a significant bit of money; however, both parties would prefer to part with as little money as possible. Depending on the housing market and the negotiation, as♈king for seller-paid points or concessions can be feasible and ♈worth asking for.

The first step is to determine whether you're in a buyer's or seller's market. If you're in a buyer's market and competition to sell is high, then you have a better chance of getting the seller to pay. Also, if the homeowner hasn't been able to sell their property for a while, they will be more likely to offer points to close the deal.

Another point to note is how much you're asking for when purchasing the house. For example, if the house needs some repairs, asking the seller to cover those repairs and your points may not be prudent. Deciding which is more important will be better and less complicated, making the homeowner more likely to sell to you.

If you're working with a real estate agent, you can ask them about properties in the same area and if they've closed with seller-paid points, which can strengthen your place in the negotiations.

Example of Seller-Paid Points

Here's a hypothetical example to show how seller-paid points work. Let's say a buyer wants to purchase a home with a listing price of $250,000. The buyer plans to put a 澳洲幸运5官方开奖结果体彩网:down payment of $50,000 or 20% of the purchase price.

As a result, the buy𒈔er plans to take out a $200,000 mortgage loan to b🧔e paid in monthly installments for 30 years at a rate of 4.50%. Below are the financial details of the loan.

As shown above, the buyer's monthly mortgage payment would be $1,013, excluding property taxes and home insurance. By the end of the 30-year period, the home would cost the buyer $164,814 in interest.

The seller decides to offer two seller-paid points. The lender knocks down the interest rate by 0.25% for each point, meaning the new inౠterest rate is 4.0%🦄. Below are the new financial details of the loan.

The buyer's monthly mortgage payment would decrease to $955 per month, excluding property taxes and home insurance. By the end of the 30-year period, the home would cost the buyer $143,739 in interest.

Assuming no extra payments were made over the course of the loan, the buyer would save $21,074 b🐼y the time the mortgage loan was paid off in 30 years, thanks to the seller-paid points.

The Bottom Line

Seller-paid points benefit buyers and sellers in different ways. Buyers benefit from paying less throughout the mortgage when the seller pays points instead of reducing the property price. Sellers benefit by enticing buyers to sell their homes more quickly. This can be a helpful strategy in a buyer's market where there's a lot of competition, and the seller just wants to close or needs cash from the sale.