Lender Credit

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Lender credit is monetary credit from your mortgage lender to help offset your closing costs.

What is lender credit?

Lender credit is a lump sum from your lender, usually in the amount of a few thousand dollars, that will cover most or all of your closing costs. However, this “free” money comes at the expense of a higher interest rate.

Note that it will appear as a negative number on your Loan Estimate or Closing Disclosure. This credit amount will offset your closing costs and lowers the “Cash to Close” amount. While you pay less upfront, you will pay the difference, if not more, over the life of the loan with the higher interest rate.

How does it work?

One credit point is equal to 1% of the amount that you’re borrowing. For instance, on a $100,000 loan, each point would save $1,000. The amount that your interest rate increases will vary by lender.

Let’s say that you are taking out a $180,000 mortgage on a 30-year fixed-rate loan. The interest rate is 5.0%. If you accept -0.375 in lender credit, your interest rate goes up to 5.125%. -0.375 translates to $675 that goes towards your closing costs. However, with this higher interest rate, you will pay $14 more each month over the course of your loan term. In total, this translates to paying an extra $5,040 in interest.

When is it advantageous?

If you are cash poor, a lender credit can help alleviate some of the pressure of the closing costs and give your budget some flexibility. For instance, an extra few dollars per month throughout the loan may be more affordable to you instead of a lump sum on closing day.

Additionally, if you don’t intend on staying in your home for the full mortgage term, or you think you will refinance your loan, a lender credit may actually be beneficial.

Discount Points Versus Lender Credit

Discount points allow borrowers to “buy” a lower interest rate or buy-down your interest rate in the form of upfront fees. By purchasing one discount point, which is the equivalent of 1% of your loan amount, you can usually lower your mortgage rate by 0.25%.

On the other hand, lender credit works the reverse way. You get money upfront, but your interest rate increases. While the increase may be as low as 0.125%, over the course of your 15 or 30-year mortgage, the interest will add up. It is recommended to do the math to ensure that it is worth the cost.

Both discount points and lender credits appear on your Loan Estimate and Closing Disclosure forms. Discount points are better if you plan on keeping your mortgage for a long time and can afford to pay the closing costs. Nonetheless, lender credits are better if you don’t want to pay a lot of cash upfront, don’t intend to keep your mortgage for the entire loan term, and can afford a slightly larger mortgage payment.