Seller-Paid Points

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 normally 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.

Understanding Seller-Paid Points

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 can also reduce the interest rate on a mortgage loan by a certain percentage.

Homebuyers sometimes purchase mortgage points to reduce the loan's interest rate with the goal of saving 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 documents are signed with the lender. Although homebuyers 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.

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 in order 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 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 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 on the first $750,000 of your total debt. The 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 that are 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 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 These points also have the effect of increasing a buyer’s down payment by reducing the price that's ultimately paid for the home since the borrower 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. 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.

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 list price of $200,000, but you are willing to accept an offer of $195,000. You could reduce the list price by $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 tax deduction and reduce the loan's interest rate, which would lower the mortgage's total interest cost.

Negotiating Seller-Paid Points

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.

The first step is to determine if you're in a buyer's market or a 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, it may not be prudent to ask the seller to cover those repairs and your points. 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 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 down payment of $50,000 or 20% of the purchase price.

As a result, the buyer plans to take out a $200,000 mortgage loan to be 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 interest 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 by the time the mortgage loan was paid off in 30 years, thanks to the seller-paid points.