A lender credit is an amount that decreases the upfront costs of your mortgage but will likely result in a higher interest rate.
You’re able to see lender credits on the 2nd page of the Loan Estimate. You can use the credit to pay loan costs or to fund your escrow account, but you can’t use it for your down payment.
It’s important understand that a lender credit is not free. Think of it as a trade for a higher interest rate.
Let’s say your loan officer offers you a $2,000 lender credit on your $200,000 mortgage loan. The interest rate is 4%. You should always ask what your interest rate would be without this credit. If it’s 3.75%, that’s a monthly mortgage payment difference of $29 ($348 a year). If you plan on staying in the house for more than 5 years and 9 months ($2,000 credit / $29 = 69 Months), the trade isn’t worth it in this example.
You should consider taking a lender credit if you plan on living in the house for just a few years or if you are taking out a mortgage in a historically high interest rate environment. A historically high interest rate environment means you’ll be more likely to refinance if rates fall to a historical average.
A discount point is the opposite of a lender credit. A discount point is a fee that you pay upfront to lower your interest rate on your mortgage.
Read more on monthly mortgage mortgage payments here.
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