Is a Lender Credit Mortgage Better Than a Lower Interest Rate?

Is a Lender Credit Mortgage Better Than a Lower Interest Rate?

Dear Dr. Don,
I was given two quotes on refinancing a mortgage. One is at 4.125 percent with minimum fees including a $5,400 lender credit. The second quote is at 4 percent, but my loan amount increases by about $7,000. The higher rate would be about $7,000 more expensive at the end of the loan term. The monthly payments differ by just a couple of bucks.

Read about:   Understanding Widespread Mortgage Phrases and Definitions

Which is best: the lower principal or the lower interest rate? The impact of $7,000 seems small. I’m tempted to go with the higher rate because my principal would be lower. Help!

— Celestine Chooses

Dear Celestine,
It depends partly upon how long you plan to be in the home. If you expect to be a short-timer, you’d want the lender credit and slightly higher interest rate. Someone expecting to be in the house for the long haul should opt for the lower interest rate.

Search for the lowest mortgage rates

My guess is that you don’t have the cash to pay closing costs, so you have two options: Capitalize the cost by adding it to the loan amount, or pay a slightly higher interest rate and accept the lender credit to cover most or all of your closing costs. What are the total closing costs on the loan with the lender credit? You’ll want to review the good faith estimates on the two loans to see the closing cost differences. If they’re both $7,000, then you’ll need to bring $1,600 cash to closing on the loan with the lender credit.

You want to minimize total costs over the time you expect to retain the mortgage.

You can use Bankrate’s mortgage payment calculator along with the calculator amortization schedule to determine the loan balances and interest expense over that horizon.

Here’s a table showing a scenario for a $300,000 mortgage at the two interest rates you provided. I’m going to assume there’s $1,600 in closing costs above the lender credit. That cost is capitalized by adding it to the loan balance. To make the monthly cash flows the same, I’m also going to assume that the difference in the monthly payments is used as an additional principal payment.

Read about:   FHA Loan Rules for Second Homes

Mortgages: Lender credit vs. no lender credit

Loan amount $301,600 $307,000 $5,400
Interest rate 4.125% 4% 0.125%
Loan term (months) 360 360
Loan payment $1,461.70 $1,465.66 $3.96
Additional principal payment $3.96 $0 $3.96
Total monthly payment $1,465.66 $1,465.66 $0
Total interest expense $112,304.17 $110,746.55 $1,557.62
Loan balance $238,024.54 $241,866.75 $3,842.21
Net savings from lender credit $2,284.59

In this 10-year horizon example, the lender credit mortgage has the advantage, mainly because of a lower loan balance. While this is not your precise situation, it at least provides a framework for comparing your choices.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Financing a home,” “Saving & Investing,” “Senior Living” or “Money.” Read more Dr. Don columns for additional personal finance advice.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.

22 thoughts on “Is a Lender Credit Mortgage Better Than a Lower Interest Rate?

  1. PedroOrith says:

    buy viagra online canada: viagra – price of viagra

  2. Brick City Vapors says:

    I manage a vape shop submission site and we have had a posting from a vape shop in the USA that likewise markets CBD items. A Calendar month afterwards, PayPal has written to use to say that our account has been restricted and have asked us to remove PayPal as a payment solution from our vape shop directory. We do not retail CBD goods like CBD oil. We only provide web marketing professional services to CBD firms. I have had a look at Holland & Barrett– the UK’s Leading Health Merchant and if you take a close peek, you will see that they sell a surprisingly comprehensive stable of CBD goods, primarily CBD oil and they also happen to accept PayPal as a payment method. It seems that PayPal is applying contradictory standards to different firms. Because of this limitation, I can no longer accept PayPal on my CBD-related internet site. This has restricted my payment choices and now, I am seriously reliant on Cryptocurrency payments and direct bank transfers. I have spoken with a barrister from a Magic Circle law firm in London and they stated that what PayPal is undertaking is completely against the law and inequitable as it should be applying a systematic criterion to all companies. I am still to talk with another lawyer from a US law office in London to see what PayPal’s legal position is in the USA. In the meantime, I would be highly appreciative if anyone here at targetdomain could provide me with alternative payment processors/merchants that work with CBD firms.

  3. Is anyone here in a position to recommend Large Accessories? Thanks x

  4. Total Vape Tacoma says:

    Has anyone shopped at Boca Vapes Vape Shop in 7231 Harford Rd?

  5. how much to take of bali kratom first time says:

    Does anybody know if I am able to purchase JUSTKRATOM Red Maeng Da Kratom Capsules ( at Favorite Vapors, 311 Ludlow Ave, Cincinnati, OH, 45220?

  6. runtz package says:

    Does anybody know if I can buy Just Delta 8 Cartridges ( from One Stop Vape Shop, 882 Heritage Blvd West, Lethbridge, AB, T1K7V5?

  7. cbd gummies tucson says:

    what are cbd gummies for

  8. 9 South Vapes says:

    Let me know The Vape Shop vaporizer store located in 106 N Church St offers e-juice manufactured by Salt Series by Maine Vape Co? I have emailed them at [email protected]

Leave a Reply

Your email address will not be published.