Put Seller Credits Toward a More Affordable Mortgage

In any market, some sellers will be open to providing incentives for buyers. In times of high competition, the seller may want to move quickly to meet the short timeframe for closing on their next home. Alternatively, in more relaxed markets, sellers want to draw as many offers as possible. This incentive is typically in the form of a seller credit – an amount of money to be given to the buyer at closing. When your real estate agent negotiates a seller credit, what’s the best thing to put it toward? 

Common One-Time Uses 

Seller credits can provide peace of mind when it comes to the initial financial decisions of buying a home. For example, let’s say you find a home that you could see yourself living in but the cost of a repair that needs to be made is preventing you from making a confident decision. While the seller may not agree to do the repair, they could cover some of the cost to do so in the form of a seller credit. Similarly, buyers may use seller credits to reduce upfront costs at closing or cover fees associated with breaking the lease on an apartment. These are one-time uses of seller credits that ease the hesitation to buy a home. 

Long-Term Uses 

While an initial gain in the steps to confidently purchasing a home is a benefit, we suggest that a more powerful application of seller credits is for long-term financial success. What we are talking about is lowering your interest rate. There are two ways a seller credit can lower your interest rate.

1. Discount Points – A point is a percentage of the loan amount due at closing that will permanently reduce your rate. Depending on the number of points, you could save hundreds monthly and thousands over the life of the loan. 
2. 2/1 Buydown – A 2/1 Buydown is an upfront fee, paid by the seller, to lower your interest rate by 2% the first year and by 1% the second year, saving you a significant amount of money per month and over the course of two years. At or before the third year, you can refinance your mortgage to the market interest rate and keep that rate permanently. 

So, while your upfront costs may remain the same, you will be creating extra room in your monthly budget. Moreover, at a certain point in your mortgage, you will start saving more money than the amount of the seller credit. In other words, you will have turned upfront money into even more money later. 

Lower Upfront Costs vs. Interest Rate

The idea of seeing a return on an investment of your seller credits is undoubtedly appealing but we also understand that it can be hard to turn down an initial discount if the costs of buying a home are overwhelming. But consider that points or a buydown is the only way to lower your long-term costs, yet there are plenty of ways other than seller credits to lower the upfront amount. For instance, some buyers can reduce their down payment to just 3%. First-time buyers can benefit from a lender contribution (United Home Loans’ H.O.M.E Program) to cover closing costs. And many buyers can utilize down payment assistance. Using one or a combination of upfront savings tools plus seller credits to lower your interest rate is a win-win. 

Your Real Estate Team

Making the smartest decisions about your home purchase involves the work of both an excellent real estate agent to design an offer and an experienced mortgage banker to show you how you can make the most of it financially. If you’re ready to start searching for a home, reach out! We partner with great local agents who help see you through the best buying process possible.