 Personal Finance PowerPoint Presentation Seller Paid Points Get ready to get financially fit by practicing personal finance. Most of this information can be found at Investopedia Seller Paid Points, which you can find online. Take a look at the references, resources, continue your research from there. This is by Chris B. Murphy, updated February 13, 2022. 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. So we talked about points in general in a prior presentation. The seller paid points are commonly found in real estate transactions and normally consist of a lump sum paid to the buyer's lender. So now it's being paid to the buyer's lender so that you got the purchasing of the points at that point. And then you got the normal kind of points process if you purchase the points could result in a lowering of the rate. So the points help reduce the interest rate. The buyer must pay on the mortgage where one point is the equivalent of 1% on the mortgage loan. So purchasing a point then typically being when you say one point, it's equivalent to 1% of the mortgage loan for typically a reduction, some form of reduction to the interest on the mortgage, which of course would be beneficial to the purchaser for their loan. Understanding seller paid points, mortgage points represent a fee paid to lower the interest rate on the mortgage loan for the purchase price of a home. So when you're going into the purchasing process, we talked about points in a prior presentation. You possibly might have the option to pay down the interest rate. You might hear it be called paying for points and the points means you're going to put putting a lump sum up front. Someone's going to be giving the lender money up front and the lender then reducing the interest rates. When the interest rates go down, you will typically have a lower amount of monthly payments, but you need to balance out the cost of whatever the lump sum is up front versus the benefits of the lower payments that are resulting from it. Mortgage points are also called discount points because they can also reduce the interest rate on the mortgage loan by a certain percent. Home buyers sometimes purchase mortgage points to reduce the loan's interest rate with the goal of saving the total interest cost over the life of the loan. So you're balancing out the payment up front versus the lowering of the payments due to the fact that your rate should be lower. It's going to be a timing type of thing to see whether or not it would be beneficial. The longer you plan on being in the home, the more likely it would be a beneficial thing to do. The fee for the mortgage points is paid at the loan's closing or when the documents are signed with the lender. Although home buyers usually buy mortgage points, sometimes a seller might offer to pay mortgage points on behalf of the buyer to entice the buyer to purchase the home. So here's where the new step gets a little bit more complicated. So we've talked about points in general. They can be complicated in and of themselves. If you're purchasing the home and you're taking out a loan in order to do so because you need financing for the home, then you might have the option to pay the points. And that would be the situation where you're putting the money up front as the buyer in order to get a lower interest rate, which could be beneficial over time. The new step here would be the idea that the seller is paying the points as part of the agreement. So although homeowners usually buy mortgage points, sometimes a seller might offer to pay mortgage points on behalf of the buyer. So from the loan's perspective or the lender's perspective, it's no different, right? They're saying, the lender's saying, well, if someone gives me the money up front, I'm willing to lower the interest rate. So it could come from the person that's purchasing the home and taking out the loan or possibly the person that's selling the home in order to sweeten the deal could have this type of situation paying for the points. So once again, the mortgage 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%. So when we're talking about one point, we're talking about the cost of it, a percentage of the loan. When we're talking about how much is going to go down by, then it could vary depends on the circumstances, but 0.25% is kind of a general idea oftentimes depending on the market. In other words, a mortgage loan interest rate of 4% would be reduced to 3.75, 4% minus the 0.25%, bringing it down to the 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. So in other words, if you had the loan, you're talking about a loan, $200,000. If you were going to pay down the interest rates, you're going to buy a point. Or if the seller is going to buy the point for you from the lender's perspective, they're willing to whoever gives them the money, they're going to say that they're going to lower the interest rate. If they get the money upfront, so that one point means 1% of the loan typically, so $200,000 times 1% means it would be the $2,000 upfront either from the person taken out the loan, the purchaser or the seller if that was able to be agreed upon. So that's where that 1.1%. But then the amount of the interest going down, we're going to say here is 0.25%, that might be more likely to vary, but that's somewhat standard. So then it might lower, for example, the 4% down to the 3.75%, that would lower the monthly payments that would be on the loan. So seller pay points versus seller concessions. Seller concessions are when the seller of a home decides to pay some of the buyer's closing costs. So this is another thing that you could have in the negotiation agreement. It depends whether you have a seller's market or a buyer's market, but you might have situations where the seller wants to close the deal and might be doing things in order to do so. Possibly paying for some of the closing costs, for example, or in this case, possibly looking into the points. So a seller would do this in order to quickly sell the house and close the deal, particularly in a buyer's market. So if it's a buyer's market, then if the buyer has the leverage, it's more likely that these kind of things might come into play so that the seller can close the deal in a buyer's market. So you want to be aware of those of, you know, the conditions, market conditions brokers can of course help to determine what kind of market we're in and what kind of things to be looking for. Seller concessions can only be used toward 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, lower fees, title insurance, recording fees, and real estate taxes that are prepaid. Seller concession limits. There are limits to how much a seller can contribute to closing costs. The limit on FHA and USDA loans is 6% of the loan amount. For conventional loans provided by the Fannie Mae or Freddie Mac, the limit is derived from the down payment amount. 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 deductions for mortgage interest and points, but there are certain requirements that must be met before you can do so. You can deduct the mortgage interest paid only to the first $750,000 of your total debt, so that's a pretty significant amount for most people because we're not talking about the home purchase price there. We're talking about the debt, right? So you're talking about how much was financed, so that's usually going to be a fairly big amount still, although they changed that fairly recently. So the Internal Revenue Service IRS does allow you to go beyond that limit up to $1 million only if you incur your debt before December 16, 2017. So that was the prior law up to the million. So the mortgage loan, and so again, it's still there, but if your debt was before that time frame, so now we got that cutoff that you got to keep in mind if your debt was higher than the $750,000. If it's below that, then you don't have this limit cutoff for most people. It probably is below that, unless you're in a high-cost living or buying a particularly expensive place. So the mortgage loan must be used to finance your primary residence. The points can't be for costs that are listed separately at the closing or on the settlement sheet. The costs include appraisal fees, title fees, inspection fees, and 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 in order for you to qualify for a deduction. Benefits of seller paid points. Seller paid points offer 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. So that's the point. So they're going to pay down the points up front, and then you get a lower interest rate, which is going to lower the payments. These points also have the effect of increasing the buyer's down payment by reducing the price that's ultimately paid for the home, since the buyer will pay less interest over the course of the loan. Seller points could also be used to lower the monthly payment, helping the borrower afford the mortgage more easily. So clearly, if you can have lesser payments, then that would be easier to budget on. If a mortgage interest rate is reduced, the monthly payment is 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 buyer of the home. 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. So typically, if you have these kind of points, then they're kind of considered to be like a prepayment of the interest because you're basically having the points to pay down the interest. 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. So this, of course, if you're in a market where you want to get that home sold, then you might have some added items that you might put into the mix in order to do so. Sweeten up that deal. Make a deal sweet, like a sweet deal. Seller points can be a more attractive option than a straight discount. Here's why. Let's say you're selling at your home and it has a list price of $200,000, but you are willing to accept an offer of $195,000. You could reduce the list price $5,000. So you put it on there at $200,000 because you put it on there at the high price because you're expecting some haggling, some negotiation. You got your low baseline at $195,000 in case someone comes back with an offer of that amount but you're not going below that amount. So you could reduce the list price by $5,000 or you could strategically offer $5,000 and sell our points instead. So you'd still end up with the same amount of money, but the buyer would likely be better off with the points versus the $500 discount. So you're saying, okay, if they wanted to offer me $195,000, I'm willing to sell it for that. But instead of lowering the listing price and so on, I'm willing to give the $5,000 kind of in another way, possibly by giving the seller paid points. The points would come with a tax deduction and reduce the loan's interest rate, which would lower the mortgage's total interest cost, negotiating seller paid points. Well, how do you get that across possibly to people? It would be great to have points or 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. Asking for seller paid points or concessions can be possible and worth asking for depending on the housing market and the negotiation. So obviously, when you look into these other kind of concessions and types of things, it would depend on the marketplace. If you're in a situation where the seller clearly has an advantage, has a lot of people that want to buy the house, thank you very much. Then they might not be willing to do any of this kind of sweetening. I don't need any sugar in this coffee because I can sell my bitter coffee on this market because it's a seller's market. So the first step is to determine if you're in a buyer's market or a seller's market. If you're in the 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 the property for a while, so if you're like, you know, your property has been out there for quite some time. I hear you want to move. Maybe if you give me some sweeteners, put a little honey in that coffee. So they will be more likely to offer points to close in that deal possibly. Another point to note is how much you're asking for when purchasing the house. For example, if the house needs some repairs, it may not be prudent to ask the seller to cover those repairs and your points. So you've got to take it, you know, negotiation by negotiation, what's in the current deal you're looking at. Deciding which is more important will be better and less complicated. So if you're going to them and saying, yeah, I'll buy your house, but I've got a list of 10 items that are going to cost you a significant amount of money. Maybe you basically break it down to a couple of things and one or two items might be tolerable and not wreck or close or destroy the deal. So if deciding which is more important will be better and less complicated, making it more likely the homeowner will 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 the seller paid points, which can strengthen your place in the negotiation examples 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 down payment of $50,000 or 20% of the purchase price. So 20% of the purchase price of $250,000 is $50,000. The buyer is going to put down up front. As a result, the buyer plans to take out a $200,000 mortgage because they've got a $250,000 home. They're putting down $50,000. That means $200,000 mortgage loan to be paid monthly. Installments for 30 years, the standard 30 year at a rate of 4.5%. Below are the financial details of the loan. So you got the loan, $200,000 interest rate, 4.5 monthly payment, $1,013 total interest paid over the life of this thing. $164,814. Wow, that's a lot. The buyer's monthly mortgage payment would increase to $950 to $5 per month, including property taxes and home insurance. If you put those things into the bargain, the budget's looking a little bad. The budget's looking bad but not too bad. I'm still rolling forward. By the end of 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 $21,071 by the time the mortgage loan was paid off in 30 years thanks to the seller paid points. So clearly the seller paid points, if you pay down the points and the interest, then you could have a, you know, you're lowering the interest rate, which could have a benefit over the life of the loan. So are seller paid points tax deductible? According to the IRS, quote, points paid by the seller of the home can't be deducted as interest on the seller's return. But they're a selling expense that will reduce the amount of gain realized in quote. What are points paid at closing? The most common points paid at closing are mortgage points. The buyer pays fees directly to the lender at the time of closing in order to receive a reduced interest rate on the mortgage. Points paid at closing can also be paid by the seller in order to close the deal. Why would a seller pay points? A seller would pay points for a variety of reasons. If the housing market is a buyer's market and selling the house is difficult due to lots of competition, a seller would pay points to entice for buyers and close the deal. So clearly if it's a tough sale, things are tough around here. We're trying to find a buyer. There's not many of them out there. We need to sweeten the deal. That's when you might see this kind of action happening. So this is particularly true and the seller is in need of cash from the sale. So they're pressured to get this thing done. So they're going to do what they need to do to get it done, which might be giving some incentives, some added stuff. So how much does a point lower the interest rate? Each point typically lowers your interest rate by that 0.25%. That might vary, but that's a general rule.