Most home buyers (because they are advised by their real estate agent) will typically try to negotiate a lower price on the property they are purchasing. That’s understandable; nobody wants to pay full price plus its the real estate agent’s responsibility to try to get you the lowest possible price. And we all want to think that we got a great deal! But how do the numbers work out?
If you successfully negotiate a $5,000 price reduction, what does that reduce your monthly mortgage payment by? The answer is probably a lot less than you think – about $37 per month, or $440per year, or about $2,200 over the next 5 years. I’m not saying that’s peanuts, but by using a simple strategy you can negotiate terms with a seller when you’re writing an offer on their property that can dramatically increase the savings that you will realize on your mortgage costs. At least twice as much as a “price reduction” negotiating strategy. This strategy will result in the greatest overall savings in the home-buying and mortgage process.
To put things in perspective you must realize that the cost of your home is not simply the price that you paid for the property at closing. The real cost is partly determined by what you will pay in loan interest over the period of time that you own the property (the amount that you pay in principal isn’t counted because that is building equity for you). So here is the formula for determining the cost of a home: Your Selling Price – Your Purchase Price – Mortgage Interest Paid.
Here is the scenario: Let’s assume you are purchasing a house and the seller is asking $300,000. You have $20,000 for a down payment. The loan interest rate is 5.5% with zero points. If you purchased at full price and borrowed $280,000 your P&I monthly payment would be $1,589.80.
Option #1: (The traditional offer as recommended by your real estate agent.) Successfully negotiate for a price reduction of $5,000 or a sales price of $295,000 and borrow $275,000 at 5.5% interest. P&I monthly payment is $1,561.42. Your $5,000 price reduction negotiating strategy saved you $28.39 per month, $340.67 per year, and $1,703.35 over the next 5 years.
Option #2: Instead of asking for a price reduction of $5,000 ask the seller to pay 1.75 discount points to buy down your loan interest rate. The cost for the points would be approximately $4,900. The 1.75% points paid would buy down your interest rate from 5.5% to approximately 5.0%. With this option you would end up borrowing $280,000. P&I monthly payment would be $1,503.10. Your $5,000 “pay my points” negotiating strategy saved you $86.70 per month, $1,040.40 per year, and $5,202 over the next 5 years.
If you would like your own break down to see how your net worth can change please email me and I will send you your own custom break down.
