Hi, it’s John Downs from Downs Capital. Let’s talk about the mysterious advantages of lender credits. What exactly makes them so mysterious? What are they? You know, we don’t really hear much about them.

Lender credits in a way goes against the way we’re supposed to think – which is, the lowest rate is the best. You know, we’ve all heard about pain points. Points is basically a scenario where you give the lender upfront money – cash – in exchange for a lower overall interest rate. Well, what’s the reverse of that? Think of a lender giving you a little bit of cash upfront in exchange for a slightly higher interest rate.

A lender credit’s not for everyone, but sometimes they can be very attractive. For a bondholder it’s a cash flow game. If they assume you’re going to keep that mortgage for let’s say seven years, then they’re willing to give you a little bit of money upfront in order to entice you into that higher interest rate. But the cool thing is, you don’t have to keep the loan that long if you don’t want to or if market dynamics allow you to refinance. There’s a good chance you can refinance with better rates in the future, but the risk is, what if rates never drop? And what if you never get to reposition that loan? So that’s the risk.

 

If you’re buying a house and you’re short on cash, lender credits are an amazing option to help absorb closing costs. Or if you’re refinancing a home, those same lender credits can help you in the same way. Let me explain why this is so good. So on a $500,000 loan, let’s say in settlement the lender gives you a $10,000 check. You then say to the lender, all right. I’m going to go ahead and pay you $200 a month in exchange for that $10,000. You know, at some point there’s a break-even period where your $200 a month equals that initial $10,000 that they gave you.

If you keep the loan longer than that, well, the lender made out on the loan. If you exited that loan and refinanced before that break-even period, you will have made out on that deal. You know, another thing is as a borrower you get a tax break on that extra $200 you’re paying. So really, in that previous scenario, that 50 month recapture period could be more like 60 months or 70 months, six or seven years. So lender credits are extremely compelling.

You can do the math to see if it’s good for you and maybe it just gives you that chance to invest in a home a little sooner and start building equity.

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