Today I want to discuss the lender-paid closing cost. What is it? What does it really do for you? To help me unpack the subject, I have with me Rhett Delaney from Movement Mortgage.
Lender-paid closing costs are a percentage of your loan amount that is given to you as a lender credit. We form that percentage based on the interest rate you choose. When you’re looking at your loan estimate and trying to figure out the cash you’ll need to close, you can pay for your closing cost completely out of pocket or, even better, the seller can pay for it.
If you hear an advertisement saying that a company will pay your closing costs, the benefit will depend on how long you’re going to be in the home. In the short term, lender-paid closing costs make sense because you’ll choose a higher interest rate and get an upfront benefit, rather than having a lower interest rate and paying those fees and getting a long-term benefit.
In other words, you’ll get the most benefit if you’re going to be in a house for three to five years. If you’re going to stay in the house long-term, you’ll want a lower interest rate since the cost-benefit of having that lender credit will be diminished.
There’s no such thing as a free lunch; the money is coming from the margin of the interest rate chosen. The amount you’ll have to pay in closing costs really depends on the property, but it’s usually anywhere from 2.5% to 3.5% of the purchase price. At a 4.5% rate, there will be minimal lender-paid closing costs because we’re giving you the best rate that we can without having to charge any fees for it.
If you choose a higher rate such as a 5.5%, you can get upwards of 2% of your loan amount as a lender credit to cover any of those closing costs. For example, at a 5.5% rate, for every $100,000 that you borrow, we might be able to give you $2,000 or more, depending on what rates are doing to help cover those costs. In terms of your monthly payments, for every 1% increase in rates, about 10% of your purchasing power is being taken away—a substantial jump in your monthly payment.
So overall, if you’re going to be in a house for a short period, it might make sense to do lender paid closing costs, but over the long-term, the lower rates will be much more beneficial to you.
If you have any questions, you can refer to this page for more details about lender credits, or you can reach out to the Dee Team. We’d be happy to help you understand your options and form a strategy to best help you get in the home you like, whatever your circumstances.