The impact of a lower interest rate vs lower price
If you’ve purchased a home or are familiar with the process of purchasing a home you know that the main negotiations are around price. There can certainly be other factors such as Completion dates or Subject removal dates but price is generally the most sensitive negotiation factor.
What I want to write about today is the opportunity to negotiate with an addition tool… a Mortgage Subsidy.
Why would you want to involve another variable into the negotiations…Simple, it has a massive impact on your cash flow.
How it works:
Instead of or as well as negotiating on price, you can also negotiate a Mortgage Subsidy into the Purchase Contract.
Here is the impact:
On a home listed for $500,000, typically you would make an offer for what you’re willing to pay. In this example, let’s assume both parties agree to a $490,000 Purchase Price. With 20% down, at a mortgage rate of 2.89% and 25 year amortization the monthly payment goes from $1,870/mo to $1,834/mo due to the $10,000 discount off list price. A difference of a whopping $36/mo!
Let’s take that same home and instead of negotiating the price, you could negotiate a $10,000 Mortgage Subsidy into the Purchase. The same net offer to the Seller ($10k off price vs $10k Subsidy incentive). If you decide to take a 1 Year Subsidy term your payments would go down to $1,037/mo, a difference of $833/mo. If you decided on a 2 Year Subsidy your payments would be $1,453/mo, a difference of $416/mo.
After the Mortgage Subsidy term, your payments would go back to your normal contract rate, in this case the $1,870 per month. You are not paying any higher rates or giving up anything on your mortgage. Think of it as an add on.
How would this impact your lifestyle when buying a new home?