A lender credit is exactly what it sounds like, a credit from your lender to be used pay for closing costs and settlement charges.
Much is often discussed in regard to minimum down payments when purchasing a home, but one area that is often overlooked is the area of closing costs.
On a $250,000 home purchase loan, the closing costs for a conventional loan might be near $4,500 when adding in all fees and near $2,500 on a similar sized loan type for a refinance.
However, you don’t always need to pay these fees out of pocket, as you can often times receive a lender credit for closing costs.
How Lender Credits Work - Purchase
A lender credit is most often given, by having a lender increase your interest rate slightly.
For instance, if we take the example of the $250,000 home purchase loan, and use an example of a 4% interest rate with no lender credit, the principal and interest portion of your mortgage payment would be $1,193.54.
Now, while the numbers will vary from day to day, in general, it would take raising your interest rate roughly .25% in order to receive a lender credit of $4,500 to cover all closing costs in this scenario.
Therefore, the principal and interest portion of your mortgage payment would now rise to $1,229.85 at a 4.25% interest, which would be $36.31 per month more than the payment at 4% monthly.
That means it would take you roughly 124 months to recoup the $4,500 extra paid for the closing cost option loan with a slightly lower interest rate ($4,500 / $36.31).
How Lender Credits Work - Refinance
The same applies for the refinance and with lower closing costs associated with refinances, you can often times receive a no closing cost loan with only a .125% increase in an interest rate.
So, if we start again with the 4% interest rate on a $250,000 loan with a principal and interest payment of $1,193.54.
By going to 4.125% on a $250,000 and receiving a lender credit of $2,500, the monthly principal and interest portion of the payment rises to $1,211.62.
This means that to receive a lender credit of $2,500, your monthly payment would increase by $18.08 per month. Which then means it would take 138 months to recoup the cost of paying closing costs ($2,500 / $18.08).
For these reasons above, I believe it always makes sense to also explore a lender credit for closing costs, whether you are purchasing a home or refinancing a home loan.
For more information on current home loan programs and options for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 219-3682 or by emailing: firstname.lastname@example.org or online at www.strategicmtgaz.com
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