Sometimes it’s hard enough putting enough money aside for the down payment to buy a house, and then there are closing costs on top of that. You can reduce how much you have to bring to closing by getting a credit from your lender. This is entirely legal and above-board since you’ll be paying it back over time in the form of a higher interest rate.
When your lender quotes rates and fees to you, you’ll get a range of rates from lower to higher. Lower rates will require upfront interest in the form of what’s called a “discount point.” One discount point equals one percent of the amount borrowed. On a $500,000 loan, one point is $5,000.
If your lender offers a 4.25% rate with no points on a 30-year loan you might also be able to get a 4.00% rate by paying one discount point. But let’s take it the other direction and RAISE the interest rate, say to 4.50%. Since that rate is higher than what’s called the “par” rate (interest rate with no points), the lender may offer a one point credit back to you at closing. On that same $500,000 30-year loan, the 4.50% rate may give you a $5,000 credit. This means you have to come to the closing table with $5,000 LESS than you would have with the 4.25% loan. (I’m just using round numbers. Check with your lender for specifics about what is currently available.)
As the saying goes, there is no such thing as a “free lunch.” Depending how long you keep that loan, you will pay WAY more than $5,000 in extra interest due to the higher rate. Plus, there will likely be a pre-payment penalty that applies if you pay the loan off in full early. And the monthly payment will be higher which may make it harder to qualify for the loan at all.
If you have questions about real estate, call me at (925) 240-MOVE (6683). Voted “Best of Brentwood” multiple times. To search the MLS for free, go to: www.SharpHomesOnline.com. Sharp Realty. #01245186