When closing on a new home, you might consider mortgage lender credits to offset costs and save money upfront. Before deciding, however, it helps to know how these credits can affect your original loan estimate and what they’ll really cost you in the future.
At Altitude Home Loans, we make home purchasing in Tucson, AZ, more manageable by considering the best options for new homebuyers. Read our guide on the pros and cons of using mortgage lender credits, and call us at 520-500-1010 for help deciding whether or not they make the right type of loan to close on your new home.
Pro #1: You Pay Less Upfront
The typical closing cost on a new home averages between 3%-6% of the total value of your loan. A loan of $300,000, for example, adds up to $9,000-$18,000 in total closing costs even after making your down payment.
When faced with paying these costs upfront, many new homebuyers find themselves daunted. Mortgage lender credits offer a way out of paying some closing costs in exchange for a higher interest rate on your loan. By absorbing the closing costs, lenders allow you to pay less upfront, which can make all the difference in moving into your new home sooner.
Pro #2: You Can Put More Money Down
Homeowners short on cash may consider lender credits if they want to reduce expenses for their monthly mortgage payment by making a larger down payment. If you can’t afford a 20% down payment, lenders require you to pay a PMI, or private mortgage insurance.
By using mortgage lender credits to your advantage, you can make a larger down payment for your home instead of sinking money into closing costs. This can potentially eliminate the requirement of a PMI altogether, as well as reduce interest rates on your loan balance.
Con #1: You’ll Pay Higher Interest Rates
While mortgage lender credits seem tempting, they can cost you thousands in interest later. Consider the following example of a $200,000 loan for a 30-year mortgage:
- You decide to accept lender credits at a 4.25% interest rate to avoid paying a closing cost of $6,000.
- That locks your monthly payment at $983.88: just $30 more than if you paid your own closing costs at a lower interest rate.
- But by the end of your loan term, the total cost of your interest adds up to $154,196.73: $4,500 more than if you’d paid your original closing cost fees of $6,000 at a lower interest rate.
Con #2: You’ll Face Higher Refinancing Prices Later
Homeowners can expect to pay between 2%-6% of their total loan when looking to refinance their home. Refinancing costs also reflect the price of your future closing costs. Since mortgage lender credits raise the value of your total loan, your closing costs increase as well, causing the price of refinancing to go up altogether.