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Lender Credits: How They Work, and How to Weigh the Benefits Against the Risks
One way to reduce your upfront mortgage costs is with lender credits. A lender credit helps to cover some (or all) of your closing costs, which can save you thousands of dollars. The tradeoff is that you typically must accept a higher mortgage rate.
TL;DR
- Lender credits lower closing costs by increasing the mortgage interest rate.
- The value of a lender credit depends on how long the borrower keeps the mortgage.
- The break-even point is when the extra interest paid equals the closing cost savings.
- To calculate the break-even point, divide the upfront credit amount by the monthly cost of the rate increase.
- Lender credits can be beneficial if the borrower sells or refinances before the break-even point.
- If the mortgage is kept long-term, the higher interest rate will eventually cost more than the credit saved.
- Lender credits do not reduce the loan balance.
- Lender credits cannot exceed eligible closing costs; excess amounts are not refunded as cash.
- Higher monthly payments from increased rates can impact debt-to-income ratio (DTI).
- Compare Loan Estimates from multiple lenders, considering rates, fees, and lender credits based on your expected loan term.