The Challenge of Closing Costs
When you buy a home in the USA, you'll need to pay not only the down payment but also additional closing costs. These costs may include attorney fees, appraisal fees, credit report fees, prepaid property taxes, and other expenses required to finalize your mortgage and complete the home purchase.
Closing costs can add thousands of dollars to the cost of purchasing a property, typically around 2–5% of the home's value. If covering these costs feels overwhelming for a borrower, lenders may suggest using a lender credit.
In this article, you’ll discover what a lender credit is, when it makes sense to use this option to offset closing costs, and what alternatives you may want to consider.
Lender Credit: Lower Closing Costs in Exchange for a Higher Rate
Are you a first-time homebuyer, or do you have limited cash savings, or don't plan to keep the mortgage for many years? If so, a lender credit may be a good option.
A lender credit is money the mortgage lenders provide for homebuyers to help them pay some or all of their closing costs.
It means that instead of paying all your closing costs out of pocket, your lender will pay part of them on your behalf.
In exchange, you will pay a slightly higher mortgage interest rate for the lender's contribution. The lender will recoup the amount of the credit over time by charging you more interest during the term of the loan. For many borrowers, a lender credit can make purchasing or refinancing a home much more affordable.
Which Closing Costs Can a Lender Credit Cover?
A lender that provides a lender credit may help you pay for several closing expenses:
- Appraisal fees
- Recording fees
- Title services and title insurance (ownership verification and protection)
- Loan underwriting fees
- Document processing fees
- Other eligible closing costs
Сoverage varies by lender and state. However, you’ll still need to meet the minimum down payment requirements to obtain a mortgage loan. Lender credits generally apply to closing costs, not to your down payment.
When Can a Lender Credit Be Beneficial?
First-time buyers frequently want to have some extra cash available after a down payment rather than using it all up on closing costs. Having money left over after buying a house can help with moving costs, furniture, repairs, or building an emergency fund.
If you're refinancing your mortgage and want to limit out-of-pocket expenses, lender credits could also be a reasonable solution.
Also, some borrowers choose lender credits because they expect to sell their house soon or refinance again in the near future. Therefore, the additional interest they will pay over time on the loan may be smaller than the immediate savings received at closing.
Ultimately, which option is best for you will depend on your financial needs, cash available right now, and how long you plan to keep the mortgage loan.
Situations Where a Lender Credit May Not Be Ideal
Reducing your closing costs is appealing, but a lender credit may not always be the best way to save money. With a lender credit, your mortgage will typically have a higher monthly payment.
If you plan to live in the home for a long period of time, you will likely pay more in interest than you saved when you closed. If you have enough savings to pay for your closing costs, it may be more beneficial not to take a lender credit and instead secure a lower interest rate.
Saving on a 15- or 30-year mortgage with even a small difference in interest rates could greatly impact how much you save overall.
At LBC Mortgage, we recommend you compare several different loan options before making your final decision.
Other Options for Lowering Closing Costs
Several other options may help reduce your closing expenses instead of choosing a lender credit.
Seller concessions: The seller of the home agrees to help cover some or all closing costs incurred by the buyer in the process of purchasing the home.
Down payment assistance programs: There are some programs available to assist buyers with their down payment and also help cover eligible closing costs.
Discount points: Purchasing discount points is the opposite of receiving lender credits. Instead of receiving money to reduce closing costs, the borrower pays extra at closing to get a lower interest rate on their mortgage. This option works well for borrowers who plan to live in their home for a long period of time.
Is a Lender Credit Right for You?
Some borrowers want to keep their upfront costs as low as possible. Others may prefer paying their closing costs themselves, but securing a lower mortgage interest rate.
Consider the following factors before making a decision:
- How much cash you will have available to you at the time of closing
- How long you expect to keep the mortgage
- The importance of lower monthly payments compared to having fewer upfront costs
- Your plans for refinancing in the future
- Your long-term financial goals
Take the time to review all of these factors, or better yet, turn to a mortgage specialist to find the financing that best fits your situation.
LBC Mortgage Will Help You Navigate Lender Credits
We understand how challenging it is to navigate the homebuying process, especially when it comes to managing upfront costs and choosing the right financing option.
Many borrowers ask questions like: How can I reduce my closing costs? Is a lender credit a good choice for me? Or should I choose a lower interest rate instead?
Our loan specialists at LBC Mortgage will help you compare different financing options to determine which solution offers the greatest long-term value for your situation.
