Negotiating a home purchase
October 1, 2008 5:55 PM   Subscribe

When buying a house is it better to have the seller pay the closing costs or to reduce the sale price of the home?

I'm buying a house (yay!). The inspection turned up some issues so I've gotten some concessions from the seller. So far we've left it open-ended as to whether they should reduce the price of the house or pay the closing costs. Which one should I push for? There seem to be pros and cons to each. I'm favoring the price to get reduced because it means my monthly payment will be a bit less and I will also be able to cancel the PMI sooner. Is this a case of six of one, half a dozen of the other, or is one scenario clearly better than the other?
posted by jclovebrew to Work & Money (9 answers total) 2 users marked this as a favorite
Seems to me that if they lower the price by the amount of the closing cost, it'd be a better deal to lower the price. You have more out of pocket now, but if you can afford it then the interest you end up paying on the loan will be less overall. If the amount they'd lower the price is less than the closing cost, you'd simply have to do some math with the interest rate and figure out if it's a better deal.

If you can afford the immediate expense, it's probably a better deal to pay the closing cost and lower the price of the house.
posted by papayaninja at 6:23 PM on October 1, 2008

Better for the seller to lower the price as they'll pay less commission and better for the buyer because they pay less transfer/sales tax if that is applicable in your jurisdiction.
posted by Mitheral at 6:45 PM on October 1, 2008

Plus the transfer tax and property tax appraisal might come in lower with a reduced price.

Don't be confused here -- you are the only one bringing money to the closing table so you are paying everybody there, no matter what the Realtor® BS propaganda manual says.
posted by troy at 6:47 PM on October 1, 2008

I am not a tax expert, but there may be tax implications now or later. Capital gains taxes in the future would be based on a higher basis or if selling for a loss a bigger write-off if you keep the costs higher.
posted by JohnnyGunn at 7:00 PM on October 1, 2008

^ first $250K ($500K married) of gain is excluded under current tax law, so don't worry about that.
posted by troy at 8:09 PM on October 1, 2008

first $250K ($500K married) of gain is excluded under current tax law, so don't worry about that.

If you use this home as your primary residence for at least two years.

And as it has been pointed out, commissions will be reduced if the sale price is dropped. Although your trusty real estate agent representing you as the buyer should be looking out for your best interest (even if it is to their financial detriment), he/she isn't the one to ask. You can start out by asking someone at the title company, but for long-term effects it would be better to ask an accountant.
posted by shinynewnick at 9:11 PM on October 1, 2008

And in general terms, the lower sale price would tend to be better in the long run, as long as you have the financial stability to cover the closing costs. If you don't have that stability, you may be in over your head purchasing this house (unfortunately that's part of the current problem with the foreclosed homes - people were able to purchase homes far beyond their means with 100% financing, no closing costs, etc).

Lower sales price means less interest paid. So unless you are going to take that relatively small amount of closing cost money and invest it in some sure-fire high return instead, use it to pay the closing costs.
posted by shinynewnick at 9:15 PM on October 1, 2008

My husband and I just bought a house, and we looked at a similar problem. It's better, in the long term, for them to lower the price of the house. Our closing costs were $3500, so I'll use that and our interest rate (6%) as a talking point. But it was $3500 up front, or $3500 over the course of the loan. Our loan was over 30 years. So grab a loan repayment calculator, and put in $3500 for the loan total (because we're only talking about that chunk of it), and then put in 6% (or whatever your rate is) and 30 years (or whatever your term is). For us, the $3500 at 6% over 30 years meant that we'd ultimately pay $7557 back--so basically four grand in interest. Then the question became "would we rather pay $3500 now, or $7557 over the next thirty years?"

And, okay, you could theoretically invest the $3500, but you'd have to get a return of more than 6% a year for that to be profitable--it seemed like a stupid gamble to us.

Plus, lower house price means lower payments on your house (assuming a $100,000 loan at the previously mentioned terms, about $20 a month), canceling the PMI sooner, and possibly lower property taxes, too.
posted by meghanmiller at 8:59 AM on October 2, 2008

Response by poster: Thanks for the feedback. We went for the lower sale price. I'll pay the closing costs out of pocket (like I was expecting to do in the first place).
posted by jclovebrew at 2:16 PM on October 3, 2008

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