Lower Sale Price or Closing Cost Subsidy?

The Dilemma of Lower Sale Price or Closing Cost Subsidy

You’re getting ready to write an offer. So many things to consider: price, deadlines, title company, etc. As you’re finalizing the details, you may wonder what’s better: a lower sale price or closing cost subsidy.

Getting both is the best, of course, but for the purposes of this post let’s assume it’s either-or.

The answer is usually straightforward, with some caveats to keep in mind.

Lower Sale Price

A lower sale price will result in a lower monthly payment. Yay math! So you’ll be saving a little bit every month over the next 30 years (or however long your mortgage is).

Here’s the rub though: most buyers don’t hold on to their purchase for that long. The average is under 10 years.

Closing Cost Subsidy

By the way, closing cost subsidy has many names: seller assistance, seller subsidy, closing cost help, etc. They all mean the same thing: the buyer gets a certain amount from the seller towards their closing costs at settlement. This way the buyer keeps more of their cash.

That’s the beauty of the closing cost subsidy. You realize the full benefit right at closing, not over a number of years. That extra cash can be put to other uses or simply set aside for a rainy day.

An Example

To put the two options in perspective, let’s run the numbers.

Option 1: lower sale price

The seller is asking $500,000. You offer $490,000. Let’s assume you’re putting 10% as down-payment and the interest rate is 4.5%.

The lower sale price means your mortgage is $9,000 less ($10,000 price reduction minus the 10% down-payment). This means the monthly payment drops by a whopping $45.60.

But the savings do add up. A 30-year mortgage has 360 payments, so accumulatively you pay $16,416 less. Of course, if you sell the property in 10 years, that’s only $5,472.

Option 2: closing cost subsidy

The seller is asking $500,000. You offer full price with $10,000 subsidy. All other terms remain the same.

Your monthly payment will be $45.60 higher, but you keep $10,000 of your cash.

Of course a finance major can jump in and come up with all kinds of scenarios to compare the two options. What’s the opportunity cost of this $10,000? How’s the cost of money going to change over that period? And so on and so forth.
If you want to overanalyze this, go ahead. But I don’t think you need to. Money today is better than money tomorrow. Simple as that.

Caveats

Well, it’s not always that simple. Here are a few common issues to keep in mind.

Lender

Most loan programs have a limit on how much closing cost subsidy you can get. Almost universally, the subsidy cannot be used towards your down-payment. If you said you’ll bring 10%, you’ll need to bring 10%, even if there is unused subsidy. Whatever is left over usually goes back to the seller.

That’s another reason to always keep the money guy in the loop.

Seller

Inventory remains tight in many parts of the DC area. Buyers often have to compete. This means the top priority changes to winning the contract rather than negotiating the best possible deal. So a seller subsidy could be completely out of the question.

More questions?

There are some other situations I can think of regarding lower sale price or closing cost subsidy. But it’s almost lunch time! Feel free to contact me below and talk further.

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