10k Purchase Price Reduction versus 10k Closing Cost and Prepaid Expenses

O

orgopeach_IHB

New member
Would you rather have a 10k purchase price reduction or 10k closing costs and prepaid expenses? My lender friend told me the closing costs and prepaid would be better partly due to time value of money, but a realtor thought the purchase price reduction would be a better choice.
 
It depends if you really need the 10k right the way or not. If you are then go with closing costs otherwise go with the price reduction as it will save you money on the property tax later. Personally I would choose 10k in closing cost... 10k in price reduction will only save you about $150 - 180 depends on your property tax rate.



- Shamu
 
[quote author="Shamu" date=1244242621]It depends if you really need the 10k right the way or not. If you are then go with closing costs otherwise go with the price reduction as it will save you money on the property tax later. Personally I would choose 10k in closing cost... 10k in price reduction will only save you about $150 - 180 depends on your property tax rate.



- Shamu</blockquote>


Isn't this a matter of time value of money though. The 10K closing is immediately, whereas the 10k purchase price is spread over time with minimal real estate tax and interest increase. I agree with you Shamu but would be interested if other thnk differently.
 
[quote author="Shamu" date=1244242621]It depends if you really need the 10k right the way or not. If you are then go with closing costs otherwise go with the price reduction as it will save you money on the property tax later. Personally I would choose 10k in closing cost... 10k in price reduction will only save you about $150 - 180 depends on your property tax rate.



- Shamu</blockquote>


Couple of things to consider.



1. 10K in closing costs means 10K more in the bank, which can be invested to cover the reduction in sales price, as well as used as emergency fund.

2. 10K in sales price reduction means 10K less to finance, which means less interest to pay as well as lower property tax.



I'd say it depends on your situation, if one is a crack investor who can get a return of 10%+ per year go with the closing costs. I am no finance wiz so might not have covered all the aspects, am sure the forum veterans will be able to provide better insight.
 
[quote author="orgopeach" date=1244240327]Would you rather have a 10k purchase price reduction or 10k closing costs and prepaid expenses? My lender friend told me the closing costs and prepaid would be better partly due to time value of money, but a realtor thought the purchase price reduction would be a better choice.</blockquote>
You can actually do one of 3 things...reduce the purchase price by $10k, use the $10k for your closing costs, or buydown your interest rate by about .50-.75%. I would pick using the funds against your closing costs because that yields you the highest net present value because cash is king. Then next pick would be to buydown the interest rate (the longer you plan on living in the home the better this option becomes). Reducing the purchase price by $10k won't save you that much...maybe $100/yr on your property taxes and about $50/month on your mortgage. It really comes down to what's more important to you.
 
Peach - does this question pertain to the situation you're currently in with the offer you had in on <a href="http://www.irvinehousingblog.com/forums/viewthread/5394/">this home</a>?



If so, I think you need to consider which one the seller is more likely to agree to (if you want the house.) I think the agent will try to influence the seller to give you the prepaid expenses instead of the reduction in sales price so that his/her commission is not further reduced by this in addition to the other demands you are making in the other thread, so that may be the path of least resistance. Who knows where the seller's head will be.
 
[quote author="SoCal78" date=1244248217]Peach - does this question pertain to the situation you're currently in with the offer you had in on <a href="http://www.irvinehousingblog.com/forums/viewthread/5394/">this home</a>?



If so, I think you need to consider which one the seller is more likely to agree to (if you want the house.) I think the agent will try to influence the seller to give you the prepaid expenses instead of the reduction in sales price so that his/her commission is not further reduced by this in addition to the other demands you are making in the other thread, so that may be the path of least resistance. Who knows where the seller's head will be.</blockquote>
Agreed, the path of least resistance will be to use the funds for closing costs and/or to buydown the interest rate. Psychologically speaking, it wil be an uphill battle reducing the purchase price in most sellers' minds.
 
IR2 actually posted a spreadsheet a year ago (attached) that deals with the possibilities, but not using the $ to do a buydown of the rate.



Maybe one of the MBAs could update it to include that scenario and repost it for us?



(see IR2, I am learning from you!)
<fieldset class="gc-fieldset">
<legend> Attached files </legend> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/338_PMmj3QDqMQ1ztUB1U8lR.xls" target="_blank" class="gc-files">FinancingScenarios.xls</a> <span class="gc-filesize">(18 B)</span> </fieldset>
 
[quote author="freedomCM" date=1244251407]IR2 actually posted a spreadsheet a year ago (attached) that deals with the possibilities, but not using the $ to do a buydown of the rate.



Maybe one of the MBAs could update it to include that scenario and repost it for us?



(see IR2, I am learning from you!)</blockquote>
Ok, I'll test that USC MBA out. Give me 30 minutes.



Edit, here it is. The assumptions are pretty basic and you guys can change them as needed. From an NPV standpoint, the best option is to buydown the rate with the buyer's agent rebate with the current assumptions (the lower the NPV the better).
<fieldset class="gc-fieldset">
<legend> Attached files </legend> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/339_cPKFwGXnKch9GXwJzMDw.xls" target="_blank" class="gc-files">Mortgage calculations.xls</a> <span class="gc-filesize">(42 B)</span> </fieldset>
 
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