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What is a Lender Credit on my mortgage estimate?

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Mortgage and Lending with Cambria Mortgage NMLS 274132

What is a Lender Credit on my mortgage estimate?

Minneapolis, MN:  Face it, when buying a home, getting a mortgage loan and understanding all the fees and closing costs can sometimes feel a bit overwhelming.

Many of the items are pretty easy and straight-forward to understand; an appraisal for example. But one of the biggest confusion for homebuyers is understanding the relationship between closing costs and interest rate.

ALL LENDERS HAVE THE SAME CLOSING COSTS

First and foremost, understand that all lenders have essentially the exact same closing costs for doing your loan.  Someone has to pay them, and it is ALWAYS YOU.

The vast majority of costs are known as third-party costs. These are costs from parties other than the lender, but show up on your estimate.  Good examples are; appraisal, credit report, state deed taxes, county recording fees, and title company fees. Then your actual lender will have closing costs too, including loan origination, underwriting, processing, etc.

Finally, all loans will have pre-paid, up-front paid items. This includes pro-rated property taxes, days of interest for the remaining days of the month you close in, and your first years home owners insurance policy.

HOW YOU PAY CLOSING COSTS CAN VARY

You have four main options for paying the closing costs associated with your home purchase.

  1. Out-of-pocket
  2. Seller paid Closing Costs
  3. Premium Pricing your interest rate
  4. Combination of any or all of thes options

Paying out of your own pocket is pretty easy to understand, but the rest need explanation.

Seller paid closing costs are very popular, but very misleading. Your purchase agreement will says that you are buying the house for "X" amount, and the seller will pay "Y" amount of your closing costs. This appears on paper to be "free" closing costs for thee buyer, becausa the seller is paying. But the reality is, the BUYER is actually paying a higher price for the house to allow for the seller to "pay", and essentially allowing you to roll the closing costs into the loan itselF.  For example, you offer $200,000 for a home, and the seller agrees to pay $6,000 in closing costs.  Therefore the sellers is really netting $194,000 in his pocket for the home. This means you could have offered $194,000, but paid your own closing costs.

LENDER CREDITS

Lender credits, or premium pricing your interest rate, simply means the lender will give you a "lender credit" to lower your closing costs from the real closing costs in exchange for you accepting a higher interest rate.

Reviewing the chart below, the interest rates in RED are discount points to "buy" a lower rate. The rates listed in BLACK are "lender credits" to lower your closing costs.

You can see that at an interest rate of 3.75%, the buyer is not paying any additional closing costs or discount points to buy down their interest rate, and the lender is also not paying for, or crediting the buyer for any of their actual closing costs.

By selecting an interest rate of 3.00% in this example, the buyer who be charged all their normal and regular closing costs, PLUS and additional $4,000 to buy their rate down to 3.00%

By selecting the 3.75% rate in this example, the buyer would received a lender credit of $4,000 to reduce their closing costs. Your loan estimate would then reflect a "lender credit"

Of course you can pick any of the other interest rate and and closing cost options you deem best.

You also need to know this is just an example.  Interest rates and the charge or credit given vary.  Contact your Loan Officer for exact quotes.

So what interest rate do you want?  What closing costs do you want? What combination of interest rate and closing costs works best for you and your individual situation?

LOW CLOSING COST, NO CLOSING COST LOANS

Finally, understand that any lender claiming they have lower closing costs, or they don't charge a standard fee, it just premium pricing the loan and interest rate, but not telling you. Good lenders always show you your full options, and allow YOU to decide what interest rate and closing cost option is best for you.

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Joe Metzler is a Senior Mortgage Loan Officer for Minnesota based Mortgages Unlimited.

He was named the 2014 Minnesota Loan Officer of the Year, and Top 150 Loan Officers in the Nation for 2010, Top 100 for 2015, and Top 300 in 2016.  He provides Home Mortgage Loans in MN, WI, and SD. He can be reached at (651) 552-3681

 

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