When you're an Austin TX home buyer, what does it mean to put closing costs into a contract? I hear all the time from sellers, "I'm not going to pay the buyers' closing costs! If they don't have money to buy my house, they shouldn't be buying it!!" And buyers say, "I was told to make sure the sellers pay my closing costs. My friend did it so I want it too!"
Neither the sellers nor the buyers are looking at this closing costs thing in the right way. When a buyer is buying a house, what seller in their right mind would pay a buyer to buy their house? On the other side, what buyer in their right mind would think that a seller would actually pay for them to buy their house? Those two thoughts are obsurd.
What do you mean, Donna? One of those things has to take place for it to work, right? NO!
Here's what actually happens with closing costs; the buyer FINANCES their closing costs into their loan amount. Huh?
For example, a buyer submits an offer to a seller for $200k with the seller paying $5k for closing costs. That actually means the seller would be accepting a selling price of $195k. If the seller were to accept these terms, it's the same thing as a buyer submitting an offer at $195k with no closing costs. If a seller wants to counter to the buyer not wanting to accept anything less than a net of $200k, the sales price must then become $205k for the seller to give back the $5k to the buyer with the buyer financing those funds.
Why do buyers want to finance their closing costs instead of paying for them? The biggest reason is because the buyer has money for the down payment but not for the closing costs, and they actually need the money. The other reason? Rates are low so borrowing is pretty cheap. In today's market, with rates at about 5%, each $1k you finance, you'll change your payment by about $5 a month (nice rounded numbers). If you roll $5000 into your financed amount, you will pay an extra $25 a month.
Why would you want to pay an extra $25 a month if you have the cash in pocket? Do the rest of the math... It takes 200 months to make up that $5000. That's 16.67 years!! How many people do you know that stay in their homes for 16+ years? If you stay in your house the average time, around 6 years, you will have only paid $1800 of the $5k for closing costs.
Yes, you're paying interest for 30 years (or 15 years) for this amount, but you also have a tax deduction for the interest paid. In the example above, look at how much money you keep in your pocket for a rainy day. Instead of paying $5000 at closing, you can pay the $25 a month and have that cash for carpet, paint, appliances, furniture, or any emergency that comes up.
Cash in your pocket is more valuable when money is so cheap to borrow...
If you're an Austin TX Home Buyer and want an experienced agent to negotiate the terms of your new home purchase, please don't hesitate to contact me today!
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Copyright© 2011 By Donna Harris, All Rights Reserved. You may re-blog with links back to this post.
*Real Estate - Austin TX - How Do Closing Costs Really Work? * was first published on donnahomesblog.com.