Lender credits are the opposite of discount points. With lender credits, you accept a higher interest rate and the lender gives you money back at closing. Points: pay more upfront for a lower rate. Credits: get money back at closing with a higher rate. Choose based on your cash needs and how long you plan to keep the loan.
How Lender Credits Work
When a lender offers credits, they are essentially paying you to take a higher rate. The credit amount depends on how much higher the rate is. A 0.25% higher rate might give you 0.5% to 1.0% of the loan amount back at closing. On a $350,000 loan, that is $1,750 to $3,500 in your pocket.
Comparison: Credits vs Points
- Points:Pay upfront, lower rate permanently
- Credits:Get cash back, higher rate permanently
- Best for long-term (7+ years):Points
- Best for short-term (under 5 years):Credits
- Cash needed at closing:Points = more, Credits = less
When Credits Are Better
Lender credits make sense when you are tight on cash for closing, plan to sell or refinance within 5 years, or want to preserve your emergency fund. The cash back can cover closing costs or be used for moving expenses and furnishings.
Break-Even Analysis
The breakeven for credits is the opposite of points. With credits, you get money now but pay more each month. If you sell before the extra monthly cost exceeds the credit amount, credits win. On a $350K loan, a credit of $3,500 with $60/month higher payment: 58 months to break even. If you sell before that, credits were the right choice.
Cash Flow Impact
Credits reduce your upfront cash needed but increase your monthly payment. On a $350K loan, a $3,500 credit might mean $60/month more. Over 30 years you pay $21,600 more. But if you only stay 3 years, you pay $2,160 more and kept $3,500. That is a net gain of $1,340.
