Have you heard the old saying “Cash is King” ? Or how about this one – “Always Use Other People’s Money”?
When you purchase real estate both of the above are good rules to follow for many people. I, for one, would much rather have cash working for me, earning more than it costs to borrow the cash. But how does this apply to real estate?
Let’s start with some small savings. This idea will possibly help your cash flow at closing by requiring you to bring less cash to the closing table. Whatever day of the month you close, you will pay the interest due on the mortgage from that day until the end of the month. If you close in the first of the month, and your mortgage payment is $3000 monthly, you’ll pay, at the closing, almost $3000 for prepaid interest. If you close on the last day of the month, you’ll pay about $100 prepaid interest. In the long run, you’ll pay every penny owed from the day to take the mortgage out until it’s fully paid off. This won’t really save much, it will simply require less cash outlay.
Now let’s look at some things that can conserve some worthwhile amounts of cash.
This is an old process that has been in use for many years. But very few agents mention this great tool to their buyers or sellers. This great tool is called a seller’s concession. Here’s how it works for a buyer.
You find the house you want to buy, make an offer and (hopefully) come to an agreement on the price. We than tell the seller that we are going to pay $10,000 more than the agreed upon price. And that we want the seller to pay $10,000 or our closing costs. This adds the $10,000 onto the mortgage amount, which will raise the mortgage payment, at today’s rate of 4%, by $47.34 per month. Is it worth $1.58 per day to have an extra $10,000 to invest of to pay high interest rates credit card bills. For many people it is.
Let’s take this a little further. Let’s ask the seller to pre-pay interest points, thus reducing our mortgage interest rate? We can conserve even more cash this way. Here’s an example. Let’s say we take a mortgage with a principal amount of $200,000. at 4.5%. we pay 2 points ($4,000) which will reduce the interest rate to 4%. This lowers the monthly payment by $58.54. After only 68 months, you’ve recovered the $4,000 you pre-paid in points, or actually that the seller paid. For the remaining 292 months your payment is still reduced by $58.54 per month. Total savings over 30 years? $17,093.68
Is this a great country or what?