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Are you considering lender credits with your next home purchase? If so, understanding what these credits are, what they mean for your mortgage, and when to use them is crucial. In this article, we’ll go over everything you need to know in order to make the best decision when buying a home.
Purchasing a home can become quite an endeavor, especially when it comes to cost. For instance, as a home buyer, you usually need to come up with a down payment, cover the home inspection, have the funds for moving costs, closing costs, and so on. What’s more, the additional costs/fees can seem overwhelming for many. This is especially true if this is your first home purchase. But if you are concerned about the extra expenses, there is no need to panic; lender credits may be able to help ease this financial burden–all while possibly saving you thousands of dollars and making the entire real estate transaction more affordable.
When it comes to buying a home, you may have hear the term mortgage lender credits; however, you might not know exactly what they are or how to use them correctly. Thus, to better assist you, here is everything you need to know about lender credits.
Lender credits are additional funds from your mortgage lender that help pay upfront home-related closing costs associated with your home purchase or refinance. Typically, lending institutions or a lender may offer several thousand dollars in credit to cover most of those costs, or even all (a no closing cost mortgage loan). That credit is applied towards your cost at closing.
Lender credits are the opposite of discount points. Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. Opting for either mortgage points or credits from your lender will change your interest rate. And either option will appear on your loan estimate and/or closing disclosure. Lender credits are essentially the opposite of mortgage discount points. Instead of paying a fee to get a lower rate the lender provides you a credit in exchange for a slightly higher rate. A lender credit will save you money upfront and you will pay more over time.
Generally, lender credits can come in handy since upfront closing costs can potentially tack on an additional 2 to 5percent to the total purchase price or mortgage loan amount. Yet, here, the good news is that if you have not set aside this money or additional cash/savings to cover said closing costs, you can still afford to buy a home since some lenders offer lender credits to help offset the overall cost.
Understanding how lender credits work is fairly straightforward. Normally, your mortgage lender will pay your closing costs in exchange for you agreeing to pay a higher interest rate. When you use lender credits, you may pay less upfront or initially. However, you might end up paying a slightly higher mortgage loan balance or rather more over the life of the loan. Consequently, it is worth noting that the more lender credits a borrower receives, the higher the interest rates will likely be, which may mean waiting a long time before for real cash savings.
As you are likely aware, the mortgage interest rate you will pay depends on your lender, the type of loan you apply for, and the conditions of the market at the time of your application. Moreover, every lender has a different fee and pricing structure. Thus, even if you receive lender credits from one lender and receive a higher interest rate, you may be able to get a lower interest rate with the same amount of lender credits at a different financial institution. So, make sure you shop around and look at what different lenders have to offer before you start the home buying process.
Deciding whether you should negotiate a lower interest rate in exchange for paying interest upfront (points), pay a higher interest rate in exchange for a closing cost/lender credit, or keep the loan as is can be daunting. But, before possibly opting for a closing cost/lender credit, it is important to keep in mind that lender credits can serve you best in certain instances. Of course, you will need to understand how each option could benefit or hurt you, initially, per month, and over the life of the mortgage loan. But let’s say cash is especially tight and you have had difficulty getting your down payment together, then lender paid or closing cost credits are likely ideal.
Yet another time you should ask or opt for lender credits is, for example, in particularly favorable interest rate environments. Thus, it almost goes without saying that now is a good time to request a lender credit to cover upfront closing costs and enjoy long term mortgage savings. Furthermore, lender credits could also be beneficial when buyers have a short time horizon on their home loans. Usually, this occurs when a buyer plans to relocate again, refinance their mortgage loan (for a lower rate or better loan terms), or pay down their mortgage loan significantly. In any of the above-mentioned instances, a lender credit for your closing costs can be a quick and painless way to save money/cash. Note, there are scenarios when lender credits may not be beneficial for your financial situation, especially if none of the above applies or if your short time horizon is simply too short.
Ultimately, when considering which loan options make the most sense, speaking with a mortgage loan professional or real estate expert can make a world of difference. Doing so will help you to determine the following:
This would also be an opportune time to discuss discount points with lenders, other methods for paying for closing costs, as well as other ways you could make your loan or mortgage payment more affordable.
Additionally, you should make it a point to figure out what your break-even point will most likely be for your mortgage loan. Your possible break-even point is the number of months it takes for your lender credit to be offset by the higher monthly payment. It is important to figure out your break-even point, so you know how long it will be before the higher interest rate could potentially start costing you money as well. That said, generally speaking, only you know if a mortgage lender credit makes sense for you and your financial situation.
Are you curious about mortgages? Do you want to learn more about how lender credits affect your home loan, closing costs, or mortgage payment? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs, loan products, and equal housing services to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
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