Closing Factor - Seller Benefits

The home purchase decision is influenced more by the cost per month than by the listing price. By using the Closing Factor you reduce the buyer’s interest payments in the early years when his budget may be tight. A 25% reduction in interest charges results from a subsidy of 1.5% for a prevailing rate of 6%. It helps the buyer to get the home he wants now by lowering his effective interest rate and covering part of his monthly payment. Applying 3% of the selling price to the standard CF gives the buyer lower early year payments than if you’d cut the price by 15-20%! That leverage is more than 5 to 1!

The buyer also benefits because he can typically deduct that seller-prepaid interest immediately for tax purposes.

HELP THE BUYER TO MOVE UP TO YOUR HOME

The Standard Closing Factor gives a 1.5% interest rate reduction for 3 years for 3 points. The Factor typically gives the buyer lower monthly payments than if you had cut the price by 15-20%. Use the calculator on the left to see how it can work for you. Here’s one example of how it might be used:

Conventional Financing

Selling price of the home: $400,000
Monthly mortgage payment assuming 20% down payment: $1,919
(Mortgage calculation of $320,000 over 360 months at 6%)

The Closing Factor

Selling price of the home: $400,000
Three points paid by seller cuts the buyer’s
effective interest rate by 1.5% for 3 years.
Seller Cost: $9,600
(3% of loan, paid from closing proceeds)
Benefit to the buyer: $297/mo.
plus $9,600 potential tax benefit.
Buyer saves $297/mo. and the mortgage payment is now: $1,622

Payments are reduced by over 15% by allocating 2.4% of the selling price to the Closing Factor!!

The Custom Closing Factor: The Closing Factor also can be customized to fit the seller's budget and the buyer’s needs and income prospects. The amount of rate reduction and the length of time may be adjusted to fit the individual buyer’s circumstances.

USE THE CLOSING FACTOR IN A COUNTER OFFER

Roll your mouse over the graph to see another option.
Assumptions
Home price: $500,000
Buyer's Offer: $450,000 Down Pmnt: $90,000
Interest Rate: 6%

Cost of Factor: $12,300
Buyer also receives a
$12,300 tax deduction

Assume a house is listed for $500,000 and a buyer offers $450,000, comprised of a $90,000 down payment and a $360,000 mortgage. The mortgage payments would be $2158/mo on a 6% fixed, 30 year instrument.

Obviously, any counter offer by the seller above $450,000 would increase the buyer’s monthly and/or down payments.

Using the Closing Factor could actually DECREASE the buyer’s payments:
If the seller counters with the Closing Factor giving an effective 1.5% interest break for 3 years and a $500,000 selling price, the buyer might now borrow $410,000 and still put $90,000 down. The Factor, costing 3 points ($12,300), would subsidize the new monthly payments by $380/mo and payments would be $2,078 for the first 3 years. Therefore, even though the price of the house is $50,000 greater, the monthly payments would actually be less than in the buyer’s offer by 4%. Payments would increase after 3 years, but the buyer would have a cumulative benefit for almost 4 years. In that time it is likely that the buyer’s cash flow will improve and he will have had opportunities to sell or to refinance.

The tax deductibility of the prepaid interest might also be viewed as a way to effectively lower the down payment. For example, a buyer with a 33% marginal tax bracket might benefit by $4,100 ($12,300/3), yielding a “net down payment” of $85,900.

A seller who concludes that he needs to compromise to close would be well served by offering the Closing Factor instead of cutting his price, or in combination with a smaller price reduction.