To ask for credit back towards closing cost or to ask for a reduction in purchase price:

Recently I helped a buyer purchase a home for (let’s just say in honor of client privacy), $300,000. After having our inspections performed, the total cost for repairs added up to $7,000 dollars.  My buyer asked whether they should ask for the purchase price to be reduced to $293,000 or have the seller credit them back the $7,000 at closing for closing cost.  In my buyer’s current situation (20% down with not much money left over in reserves), I advised my client it’s best we ask for credit back towards reoccurring and nonrecurring closing cost.  Below is an example which demonstrates this scenario.

 

Scenario 1

Asking for credit back:

Purchase price $300,000

Mortgage amount (80%) $240,000

(at 30yr 4.3% interest rate, that’s $187,569 of interest paid during life of loan)

20% Deposit $60,000

Credit at closing $7,000

Deposit now $53,000

 

Scenario 2

Asking for reduction in purchase price:

Purchase price $293,000

Mortgage amount (80%) $234,400

(at 30yr 4.3% interest rate, that’s $183,192 of interest paid during life of loan.

20% Deposit $58,600

Deposit now $58,600

 

Difference between the two:

Scenario 1: Credit back at closing you have $7,000 left in your pocket for repairs and end up paying $4,377 more of interest during your 30 year loan.  That’s $12 more in interest a month.  Monthly principle and interest =$1,188.

Scenario 2: Reduction in purchase price you have $1,200 left in your pocket from initial security deposit, but save $4,377 for the interest paid on the term of the loan.  Monthly principle and interest=$1,160. You also pay down $6,400 less principle over your 30yr loan.

If you are low on cash reserves and need to make immediate repairs to the property than scenario 1 is a better option.  Having this extra cash in your pocket after close will help with the repairs found in the inspection reports.  With scenario 2 you save $3,777 over the 30 year loan, but with option 1 you experience instance relief from the $7,000 in credit back.