Home sales price doesn’t matter!

“WHAT!” you say.  Of course price matters.  You want to buy your home for the lowest amount possible because that’s how you save the most amount of money, right?  Well actually, no.

Let me demonstrate with an example.  Suppose you are looking for Huntington Beach or Newport Beach CA homes for sale, or that you need a Long Beach CA mortgage.  Let’s say your Realtor finds a $640,000 home you would like to purchase.  Let’s assume the interest rate for a 30 year fixed mortgage of this amount with a 20% down payment was 5.875% (6.031APR) and that you are a well qualified buyer with the income, assets, and credit scores to qualify.  The payment at this purchase price and this interest rate is approximately $3,775.67 a month.Let’s also assume that the sellers are pretty firm in their asking price.  There is some room to negotiate a lower purchase price, but not as much as you’d like.

Let me ask another question.  If you had the choice to offer a purchase price of $628,500 with the same 5.875% interest rate, or $640,000 with a 5.25% interest rate, which would you pick?

Most people would go with the lower purchase price, but that is a mistake.  The better strategy is to give the seller their asking price and take that price concession that they are willing to give and instead use those funds to buy down the interest rate to 5.25%.

By asking the sellers to lower their purchase price to $628,500, your payment only drops $54 a month to $3,721.25. If instead you purchase the property for $640,000 and have the sellers pay 2.25% of your loan discount points, then your interest rate drops to 5.25% and your payment drops $201/month to $3,574.28!

I like to demonstrate this a different way.  If you took the new, lower payment, and applied it against the original loan terms and worked the equation backwards, it is like you were paying $605,703!

WHAT, you say.  Explain that again.

Ok, I will.

If you put $605,703 as the original purchase price and use the 5.875% interest rate you will get a monthly payment of $3,574.28, the same payment you would have if you paid $640,000 and the interest rate was 5.25%.  That’s a theoretical price discount of $34,297 based on monthly payment.

Plus you’ll save over $12,000 in interest costs over the first 7 years by having the seller buy down the interest rate, and since the payment is lower, it is easier to qualify as you’ll be able to show about $5,000 LESS annual income to qualify.  Believe me, anything you can do to make it easier to qualify for mortgages right now is a very good thing.

The bottom line is that if the sellers are willing to accept $628,500 then they should be willing to accept full price and pay the discount points because it is the same net proceeds amount to them.

As a buyer you can still ask for price reductions, but the main point to remember is to take the as much of the concession as you can in interest rate reduction before you ask for price reduction as that will save you more money!

So, now do you believe that price doesn’t matter as much as interest rate reduction.  I am more than willing to answer any questions and the last point I’ll make is that while this example is for a Long Beach CA mortgage, the strategy should work anywhere, especially for Huntington Beach and Newport Beach CA homes for sale!

Cheers to you and my greatest wish is that you’ve learned a strategy that will save you lots of money when it comes to buying your next home!

Thank you!