Why It's Better to Get Your Closing Costs Covered Rather Than a Lower Purchase Price in a Real Estate Transaction

When it comes to buying a home, buyers often face a critical decision: Should they negotiate for a lower purchase price or request that the seller cover their closing costs? While both options may seem appealing, there are compelling reasons why having your closing costs covered can be more advantageous in the long run.

Understanding Closing Costs 

Closing costs are the fees and expenses that buyers and sellers incur during the finalization of a real estate transaction. These costs can include:

- Loan origination fees- Title insurance- Appraisal fees- Inspection fees- Escrow fees- Property taxes and insurance

Typically, closing costs can range from 2% to 5% of the home's purchase price, which can be a significant amount of money.

The Benefits of Having Closing Costs Covered

1. Immediate Cash Flow Relief

When you negotiate for the seller to cover your closing costs, you can keep more cash in your pocket at the time of closing. This can be particularly beneficial for first-time homebuyers or those who may be stretching their budget to afford a down payment. By reducing the amount you need to bring to closing, you can allocate those funds toward moving expenses, home improvements, or emergency savings.

2. Lower Monthly Payments

If you opt for a lower purchase price instead of having closing costs covered, you might think you are saving money initially. However, a lower purchase price results in a smaller mortgage. In many cases, the difference in monthly payments might not be as significant as the upfront costs. By having closing costs covered, you can maintain a higher loan amount, which may offer better financing options or lower interest rates.

3. Tax Deductions

In some cases, closing costs may be tax-deductible, depending on your situation and local regulations. If your closing costs are covered by the seller, you may still be able to deduct these costs when filing your taxes, which can lead to potential savings. On the other hand, if you negotiate a lower purchase price, you may lose out on these deductions.

4. Better Financing Options

Having your closing costs covered can also allow you to explore better financing options. For instance, you might qualify for a more favorable mortgage program that requires a lower down payment or offers better interest rates. This can be particularly beneficial for buyers who may not have a large amount of cash available for closing costs.

5. Increased Flexibility

When you have your closing costs covered, you maintain greater flexibility in your budget. This can give you room to invest in necessary repairs or renovations after moving in. A lower purchase price might seem attractive, but it can limit your ability to make your new home truly yours.

Conclusion

While negotiating for a lower purchase price may seem like the obvious choice for many homebuyers, opting to have your closing costs covered can provide significant advantages. By reducing immediate cash outflow, potentially lowering monthly payments, and keeping more options open for financing, buyers can set themselves up for long-term success in their homeownership journey. Ultimately, understanding the full financial picture and considering both options carefully can lead to a more informed and beneficial decision.

Here is some math that I want to add in as well as an example:

Property Sales Price $1,000,000

Closing Costs-

Purchase Price: $1,000,000

Seller Paid Closing Costs (3%): $30,000

Monthly Payment (20% down, 7.5% Interest): $6,085.38

vs

Lower Purchase Price-

Purchase Price: $950,000

Buyer Paid Closing Costs (3%): $28,500

Monthly Payment (20% down, 7.5% Interest): $5,805.70

So by getting a $50,000 reduction in the purchase price you will save $279.68 on your monthly payment, save $10,000 on your down payment (20%), and $1,500 on your closing costs. But it will roughly take you 61 months to recoup your out of pocket closing costs.

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Michael Cook

Email: michael@bpgreal.com