Normally, the first thing sellers think of doing to make their houses more marketable is to reduce the price. Often, this doesn’t solve the problem, because price is not the only issue. Potential buyers, who are potential borrowers, may not have enough cash or income, so a price reduction is not helpful to them. Jack Guttantag, in Inman News offers the following scenarios.
For example, if a house is listed for $200,000 and a lender will lend 95% of that at 6.5% on a 30 year fixed mortgage, the buyer who doesn’t have much cash cannot come up with the $10,000 down payment plus transaction costs. If the sale price of the house is lowered by $15,000, the cash required from the buyer drops only $1,050. It would make more sense for the seller to pay the buyer’s closing costs of $4000.
If the buyer does not have enough income, the same price reduction only reduces the payment by $90.07. However, if the seller were to reduce the rate on the buyer’s mortgage and the interest rate were lowered from 6.5% to 5.5%, monthly payments would go down by 10.2%. the cost to the seller would be $8,740, which is 40% less than the price reduction need to reduce the payment by 7.5%.
Another way of lowering the monthly payment is for the seller to buy down the payment in first years of the mortgage. The mortgage payment may be calculated at variable rates, for instance at 3% the first year, 2% the second year and 1% the third year below the loan rate. Or for 2% the first year and 1% the second year. On the two year buy down, the payment in the first year is calculated at 4.5%, which 2% below the 6.5% rate. Thus, the payment in the first year is reduced by 19.8%. In the second year, the payment is reduced by 10.2%. The total cost to the seller is $4,324.