Home sellers can get pretty creative when it comes to marketing tools. Walk into any real estate seminar and you'll be witness to some of the most ingenious selling ideas around. One of the more common is to provide some incentive to the buyer to choose your property over others in your neighborhood.

Many times, the incentive is offering to pay some or all of the buyers closing costs. Depending on local custom and the property's price, closing costs can quickly reach several thousand dollars -- and sometimes much more, especially if there are lender points and origination fees.

Such incentives are called "seller concessions," funds from the sale that an owner can contribute toward buyer fixed costs, excluding down payment. The size of seller concessions usually relates to the amount being put down by a purchaser. For instance, with a conventional loan and a 5 percent down payment, a seller might be allowed to offer contributions worth up to 3 percent of the sales price. Anything more than 3 percent could detract from the valuation of the home.

How's that? How can more money given to the buyers for closing costs detract from the value of a sale? If seller concessions go beyond program limits, a lender might think that the house is overpriced. Yes, a house may have "sold" for $100,000, but if the seller had to give up $10,000 in concessions, what's the house really worth, $100,00 or $90,000? A lender would likely say $90,000. In such circumstance, either the buyer must come up with more cash, the owner must lower the sales price, or there must be some combination of concessions.

Because the size of seller contributions are typically limited to a range of 3 to 9 percent, depending on the loan program and other factors, both buyers and sellers need to know what is allowed before finalizing an offer. Obtaining such information represents a very good reason to speak with loan officers or knowledgeable brokers before entering the marketplace.

But what if you could make a seller concession worth far more than its original cost, yet still not exceed conventional guidelines? Rather than paying cash at settlement to offset closing costs, suppose you offer to pay 2 points so that the buyer can get a lower rate! If, in your contract, you offer to pay "discount" points to lower the buyer's interest rate, you're offering a long term benefit worth far more than reduced closing costs at settlement.

How? If you only paid $2,000 for buyer closing costs such as appraisal, survey and title insurance on your $100,000 sale, those benefits would be worth, well, $2,000.

But if you took that same $2,000 and could "buy down" the buyer's mortgage rate, say from 8 percent to 7 percent, that same $2,000 would yield a potential buyer benefit of more than $20,000 in reduced interest charges! In this way, you're offering the buyer a concession worth over $20,000, yet it only cost you the same $2,000 you might have spent for closing expenses and is within conventional guidelines.

For instance, imagine that your buyer has cash for closing, but not so great credit. On the purchase of a $100,000 house the buyer will put up $5,000 for the down payment and require a $95,000 loan. Because of the buyer's credit standing, lenders will only make such financing available at 8 percent and no points -- so-called "par" pricing. To make the deal work, you offer to pay two points if the buyer can get a 7 percent loan. Here's the math:

• $95,000 at 8 percent over 30 years = monthly payments for principal and interest of $697.08. The monthly payment x 360 months= $250,945.

• $95,000 at 7 percent over 30 years = monthly payments for principal and interest of $632.04. The monthly payment x 360 = $227,534.

• The difference: $23,411

Think of this the next time you want to get creative with a sale. Possible interest savings of more than $20,000 gets a lot more attention than $2,000.

For more articles by David Reed, please press here.

Published: March 29, 2001

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.