Definition and Example of Mortgage Rebate
A mortgage rebate, also known as a lender credit, is an incentive that a mortgage lender may offer to entice you into getting a home loan through them versus another lender. The rebate acts like a cashback reward allowing you to recoup some closing costs, such as appraisal, title searches, application processing, and other fees. However, there is a tradeoff. Typically, you must accept a higher interest rate on your home loan to receive a mortgage rebate.
- Alternate names: Lender credit, negative points
For example, imagine receiving a $100,000 home loan offer at a 4% interest rate, and the lender charges you $995 for their fees (this fee does not include the other closing costs you will owe). The lender could offer to give you a mortgage rebate (lender credit) for the $995 if you agree to pay a higher interest rate of 4.25% for your loan. Therefore, you don’t have to come up with as much money during closing.
In some circumstances, lenders may offer a mortgage rebate that isn’t connected to the interest rate; for example, as a limited-time offer or to compensate you for a problem that occurred.
How Does a Mortgage Rebate Work?
In general, all mortgage loans include closing costs. As of 2022, closing costs were $6,905 for a single-family home, including transfer taxes, according to CoreLogic ClosingCorp, about 13% higher than the previous year.
With a mortgage rebate or lender credit, the lender subtracts a percentage of your loan from the closing costs. The credit can be thought of as a “negative point,” with each point representing 1% of your total mortgage.
So, for a $500,000 home, -1 points is a $5,000 lender credit; -2 points is a $10,000 lender credit.
On your Loan Estimate or Closing Disclosure lender paperwork, the amount appears as a “lender credit” on page 2, section J. This amount reduces your out-of-pocket amount paid toward closing costs. So if you want to spend less money upfront, then a mortgage rebate means you will receive some of the money back from the lender that you already paid in fees.
Agreeing to pay a higher interest rate may decrease the overall mortgage loan amount you can qualify for or have available to purchase a home.
Your interest rate increase depends on which lender you use, the type of loan, and the overall mortgage market. Some lenders may offer the opportunity to further lower closing costs, with an increased rebate amount, if you’re willing to pay an even higher mortgage rate.
Using the earlier example, if you agree to a 4.5% interest rate instead of 4.25%, the lender might offer a $1,995 rebate. You'll avoid the lender fees and have an additional $1,000 for other closing costs you’ll encounter.
Do I Need a Mortgage Rebate?
A mortgage rebate may be helpful if you have difficulty coming up with the money to pay the closing costs. Getting a home loan can mean thousands of dollars will be due at closing, and you may not have much money left after making your down payment.
Additionally, unexpected expenses may arise during the mortgage process. Receiving a mortgage rebate may help decrease financial strain.
However, the money received from the rebate doesn’t go directly into your pocket; it is put toward your closing costs to help offset fees. And while the mortgage rebate does lower your upfront closing costs, it will most likely cost you more money in the long run with higher monthly payments through an increased interest rate.
Deciding if a mortgage rebate is right for you will depend on several factors, such as:
- How long you plan to live in the home
- How much cash you have available to meet closing costs
- The interest rates of the specific lender you choose
A mortgage rebate may benefit the lender more than the borrower. The lender will profit from the higher interest over the years. In contrast, the borrower only receives a one-time cashback rebate upfront.
Alternatives to Mortgage Rebates
Points, or discount points, work similarly to a mortgage rebate but in reverse. Instead of receiving cash back and lower closing costs, you pay more cash upfront to get a lower interest rate. Points may be a better option for someone flush with cash who prefers a lower rate than initially offered. However, you will fund more upfront.
Using your entire savings to purchase a home or pay down points can create financial challenges if unexpected expenses arise. Set aside at least three to six months of cash reserves in addition to your down payment and closing costs.
Other alternatives to mortgage rebates if money is tight include:
- Seller-paid closing costs: You could ask the home seller to help cover closing costs. In a buyer’s market, a seller might be willing to do so, but usually if expensive repairs are necessary or you’ve agreed to a higher price.
- Homebuyer assistance and grant programs: Many programs assist first-time eligible homebuyers with funds that can be used toward down payments and closing costs, as long as certain conditions are met.
- Pay standard closing costs: You’ll receive the mortgage interest rate you qualified for and don’t pay higher or lower closing costs. You essentially leave things as they are without making changes.
- A mortgage rebate is a cashback incentive that a borrower receives from a lender.
- Mortgage rebates offset fees associated with closing costs.
- A mortgage rebate is a tradeoff where the borrower agrees to pay a higher interest rate on the loan, but pays fewer upfront closing costs.
- Accepting a mortgage rebate may mean spending more money in the long run due to the higher interest rate and higher monthly payments.
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