What Are Lender Credits and Should You Use Them When Buying a Home?

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Lender credits are a tool homebuyers can use to lower the upfront cost of purchasing a home, especially when closing costs start to stretch an already tight budget. When you accept a lender credit, your lender agrees to pay part or all of your closing costs. In exchange, you accept a slightly higher interest rate on your mortgage. This trade-off can be helpful in the short term, but it comes with long-term financial implications.

Lender credits can significantly reduce what you owe on closing day, sometimes by thousands of dollars. For example, on a $300,000 mortgage, closing costs typically range from 2 to 5 percent of the loan amount, which means you could be paying $6,000 to $15,000 upfront. With lender credits, that entire chunk can be partially or completely covered. However, these credits can only be applied to closing costs—not to your down payment or other debts.

The number of credits you qualify for depends on the lender and your financial profile. To be eligible for a favorable lender credit and a competitive interest rate, you’ll likely need a strong credit score, a down payment of at least 20 percent, and a debt-to-income ratio no higher than 45 percent. Since each lender structures these credits differently, it’s important to shop around and compare at least three offers to see who provides the best value.

Lender credits are often misunderstood, especially in comparison to mortgage points. While lender credits reduce your upfront costs by increasing your interest rate, mortgage points do the opposite. With points, you pay extra at closing to lower your interest rate over time. For instance, one point usually costs 1 percent of your loan amount and reduces your rate by about 0.25 percent. Lender credits are sometimes called “negative points” because they work in reverse.

To understand the impact, consider a $330,000 mortgage. Taking a lender credit might save you $500 at closing, but you’ll pay around \$10,000 more in interest over the life of the loan. On the other hand, paying two points could cost $6,600 more upfront but save you roughly \$39,000 in interest over 30 years. These numbers highlight the importance of balancing short-term needs with long-term costs.

Negotiating a better lender credit is possible, especially if you have a solid financial profile or competing offers from other lenders. Improve your credit score, lower your debt, and don’t be afraid to ask your lender if they can offer more favorable terms.

Lender credits are most beneficial for buyers who plan to sell or refinance within a few years, since they won’t be paying the higher interest rate for the full loan term. They can also help buyers meet a lender’s reserve requirements by preserving more cash on hand. For those who are strapped for cash at closing or refinancing, these credits offer a practical solution.

However, there are drawbacks. A higher interest rate means a higher monthly payment and significantly more interest paid over time. If you plan to stay in your home for the long haul, the increased cost could outweigh the short-term benefit.

If you’re unsure about accepting a lender credit, consider other options. You can ask the seller to cover some of your closing costs, which is more common in a buyer’s market. Down payment assistance programs from local and state governments may also provide low-interest or forgivable loans. In some cases, friends or family might be willing to help with closing costs, provided you disclose the arrangement to your lender. Another option is a no-closing-cost mortgage, which rolls the fees into your loan amount. Like lender credits, these loans typically come with a higher interest rate or larger loan balance.

Ultimately, lender credits can be a smart financial strategy in the right circumstances. But before you commit, carefully weigh how long you plan to stay in the home, your monthly budget, and how much total interest you’re comfortable paying. The best choice is the one that aligns with both your short-term needs and long-term financial goals.

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What Homeowners Should Know as Rates Dip Again

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After months of fluctuation, the average interest rate for home equity lines of credit (HELOCs) has dropped again, falling five basis points to 8.22%, according to new Bankrate data. This slight decline follows a recent uptick in rates earlier in June and continues a broader trend of relative stability following the rate cuts made by the Federal Reserve in late 2024. Despite some progress, rates are still unpredictable, and homeowners looking to tap into their equity are facing an important question: is now the right time to borrow?

With home values still high in many regions, homeowners sitting on substantial equity might find this to be an appealing time to access funds—especially for large expenses. But choosing the right borrowing tool is critical, particularly as rates move in fits and starts. If you’re considering a HELOC, there are three key factors to keep in mind before signing on the dotted line.

First, consider the volatility of the current interest rate climate. The Federal Reserve paused its rate-cutting campaign earlier this year but is expected to resume cuts this summer, creating uncertainty for borrowers. HELOCs come with variable interest rates, meaning your monthly payments can rise and fall as the Fed acts. If you’re budgeting tightly or prefer predictable expenses, this kind of fluctuation could present challenges. While a HELOC remains one of the most affordable ways to borrow large sums of money, you’ll need to account for rate shifts in your budget to avoid potential financial stress.

Second, explore whether a fixed-rate home equity loan might offer more peace of mind. These loans are currently averaging just slightly higher interest rates than HELOCs—around 8.25%—but they offer the security of predictable payments. Because your home serves as collateral in either case, it’s essential to understand the risks. With a fixed-rate loan, you can calculate exactly how much you’ll owe each month, eliminating surprises. The trade-off is that you won’t benefit from future rate drops unless you refinance. Still, for those who value stability and need immediate funds, this might be the better choice.

Lastly, keep in mind that HELOCs and home equity loans aren’t the only ways to tap into home equity. A cash-out refinance could be smart for homeowners currently holding mortgages above 7%, especially if their home values have risen significantly. This strategy involves refinancing your existing mortgage for a larger amount and pocketing the difference in cash. For older homeowners (62+), a reverse mortgage could be another alternative, allowing them to access equity without the pressure of monthly repayment obligations. Each of these options carries its own pros and cons, so it’s crucial to weigh them carefully based on your financial goals, interest rate outlook, and risk tolerance.

In short, while the latest dip in HELOC rates is promising, it should be viewed with caution. Rate volatility may persist in the months ahead, and homeowners should take time to assess the full landscape before making a move. By comparing fixed-rate loans, refinancing possibilities, and other borrowing strategies alongside a HELOC, you can make a more informed and financially sound decision that aligns with both your current needs and long-term plans.

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