Why would we pay a higher price for our new home?

Question of the week:  Why would we offer a higher price for our new home?

Answer: To save money.

Huh? How can paying more save money?

Frequent readers of the WR&MU may recall the May 13th update, “How can we qualify for a higher sales price?” It dealt with buying down the interest rate to qualify for a higher loan amount, in the answer I mentioned ask the seller to credit funds to buy down your mortgage’s interest rate.

With the real estate market softening in some areas as the amount of inventory on the market increases, the market appears to be in transition away from a sellers’ market—note “in transition away from” does not mean we are in a buyers’ market. Yet.

With more inventory on the market longer some sellers may be willing to negotiate on their listing price in order to sell their home and open escrow.

But instead of offering a lower sales price, what if you offered the asking price? What if you offered the asking price and asked the seller to credit you funds for closing costs through closing equal to how much they may lower their asking price?

Huh?

Abel and Deanna have their home listed for $900,000. Alex and Hannah are in the market and want to make an offer on Abel and Deanna’s home. Going through comparable properties on the market they feel an offer of $825,000 has a good chance of being accepted. After speaking to them to put together their pre-approval package, they decided to offer full asking price for the home, and ask for a seller credit of $25,000 towards closing costs.

Why? To save money. Here is how:

Traditional Option: Offer lower sales price with no seller credit

Sales price = $875,000

Loan amount = $700,000

With 20% down payment and interest rate of 5.75% at a cost of 1.25 points here is how the transaction breaks down financially for Alex and Hannah:

Down Payment = $175,000

Costs for closing, prorated payments for interest, taxes, insurance estimated to be $19,000*

Total cash to close approximately $194000

The monthly payment for their $700,000 is approximately $4085 per month.

Higher price with seller credit option

Sales price = $900,000

Loan amount = $720,000

Down payment = $180,000

The same interest rate of 5.75% at a cost of 1.25 points, the approximate closing costs are still about $19,000. Because the credit from the seller is $25,000 this allows for an extra $6000 to be applied to points to buy down the interest rate, approximately 0.875 points, or if you add some money from your funds, you pay an extra 1 point to buy-down the rate, which costs you approximately $1000.

Now, instead of a rate of 5.75% your rate is 5.5%.

Total cash to close is:

          Down payment      $180,000

          Closing costs         $26,000

          Seller credit            -25,000       

          Total cash             $181,000

The payment on $72,000 at 5.5% is about $4088 per month.

By having the seller give you a credit for closing costs instead selling for a lower price, for the same monthly payment you save $13,000 in cash, which may come in handy to pay for moving costs, immediate costs for the new home such as bath mats, waste baskets, area rugs, plants and other expenses that seem to appear when we move to a new home.

*Closing costs are estimated based on area market for escrow, title, lender fees, property taxes, and home owners’ insurance; actual closing costs will vary depending on transaction.

There are some restrictions on seller credits, the primary being that, for most programs, the amount of the credit cannot exceed 3% of the sales price.

Have a question? Ask me!

Creating more headlines that usual, the Conference Board released the results of its consumer confidence survey. The reason for the broader coverage was the survey showed a very large drop in the confidence consumers have in the economy. The five-point drop was the largest month to month since November to December 2020. The survey is important since approximately 70% of our nation’s economy is based on consumer spending. Lower confidence in the economy, and their confidence in the economy and their personal circumstances in the next six months, typically results in a drop in consumer spending, constricting economic growth. The confidence numbers are being propped up due to the strong labor market, while increasingly pessimistic about the economy, most consumers have a more confident feeling about their income.

The decline in confidence was heard, or not heard, at cash registers as consumer spending in May declined 0.2%. Of interest, perhaps the most discretionary of spending, dining out, declined in May for the first time in four months. Further hurting some of the confidence was the decline in “real income.” Nominal disposable income, the actual amount of a paycheck was up in dollars by 0.5% in May; however factoring inflation into the equation and real disposable income is down 3.3% from last May.

Portending potential erosion in future confidence surveys, Federal Reserve Chairman Jerome Powell this week at a conference with European Central Bank leaders stated that there is no guarantee the Fed’s efforts to stem inflation will give the economy a “soft landing.” Meaning, no guarantee their spiking their benchmark interest will not put the economy into a recession. Powell said that the Fed thinks it can get inflation to decline towards its 2% target rate with economy retaining a strong labor market; “thinks” is the key word. Following that with the phrase, “no guarantee” put markets on edge. Finally, he feels price stability is the focus, which means jobs are not. Many are taking his comments to mean that the Fed is willing to sacrifice jobs to slow and reverse inflation. Confidence is impacted by many factors, what we pay for necessary goods and services, and the income to pay for those goods and services, are the two primary factors.  

Rates for Friday Ju 2022: Going through past weekly rate charts, using the same parameters which are use this and every week, the last time the 30-year conforming rate dropped 0.375% (three-eighths of one percent) from Friday to Friday was in December 2008 when it dropped from 5.125% to 4.75%, it has happened again this week. As mentioned last week, investors appear to have priced in future rate hikes into the bond and mortgage markets, and now are leaving stocks for rate bearing investments over fears of a recession sooner than later. Also pushing rates down is the long weekend as investors “flee to safety.”

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                                        5.00%                Down 0.375%

30-year high-balance conforming                   5.625%               Down 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Our nation has faults, but I feel fewer than any other. This weekend we celebrate the beginning of the United States when volunteers representing thirteen colonies bravely declared independence from the most powerful nation on earth. The declaration separated families and friends and resulted in more over seven years of armed conflict. Following the successful, for the colonies, conclusion of the Revolutionary War, Articles of Confederation bound the now free colonies, or states, together.

After four years, the states sent representatives to the Constitutional Convention that lasted from May to September 1787. During this period, and following as each state debate whether to vote to ratify the Constitution there was incredible rancor, vitriol, allegations, and derision across the major divide of those wishing for a weak, loose Federal government and more power with each state, and those who desired a very strong central government that would have more control over the states. Each side made compromises, more than the extremists from each side desired.

In the end, as you know, a less than perfect document, but the most perfect document in history that is the basis of governance, was accepted. For me, the beauty of both the Declaration of Independence and the Constitution are the simplicity and brevity of each. Imagine the tens of thousands of pages such documents would be if written today.

We have division, rancor, vitriol, allegations, and derision the major divide in our nation as represented by the two major parties; as we have had since our founding. Most of the negativity is from the edges of the sides towards the edges of the other, the rest of us get caught in the cross-fire.

As we celebrate our nation’s independence, my hope is that all take a moment to take joy in living in the greatest nation in world history, while flawed, it is less flawed than any other. America could realistically be seven, eight, nine, ten, different countries given the cultural and physical differences, but we are one. E Pluribus Unum, out of many one, as a result of our Declaration of Independence and our Constitution.

Happy Independence Day,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog