In today’s new generation of homeownership, it’s easy to fall into the category of “house rich and pocket poor”, which means having tons of home equity but no cash flow for investments or emergencies. This can happen quickly when you cover all of your closing costs out of pocket. To avoid this, lender credit is a great option for borrowers who are short on cash. 

What is Lender Credit?

Lender credits involve a lender agreeing to cover all or some of a borrower’s closing costs in exchange for a higher interest rate. In 2013, the Consumer Finance Protection Bureau (CFPB) made a new lender credit rule to prevent discriminatory rates. When a loan officer gives you a loan with a higher interest rate than the current market interest rate, the bank and the loan officer can no longer keep the monetary difference between the market rate & par rate. So, if they sold you a higher rate, the monetary difference instead goes towards your closing costs. Loan officers and banks then have to decide how much they are willing to give towards closing costs. 

How Does Lender Credit Work?

When you go to a bank or a mortgage lender and give them your financial information to get a loan, they will give you a “par interest rate”. This is the lowest rate they can sell you that meets the costs to run their business without losing money. Then, your bank or lender will charge closing costs fees that are usually 2-3% of the purchase price. This is when you can ask your lender for help to pay for closing costs. They will either offer a lender credit or suggest other available options to give you more wiggle room. 

How Much Does Lender Credit Cover?

The amount your lender gives you for closing costs depends on your loan program, credit and financial scenario. Not to mention where rates are at that day. Every lender has a different amount they need to make to maintain profitability. 

Here’s an example:

-Let’s say your lender gives you an FHA loan with a 2.625% par interest rate based on a 680 credit score and a $500,000 purchase price for a total monthly mortgage payment of $2,893.52

-You ask your lender for $10,000 to help cover closing costs. 

-Your lender offers lender credit to cover $10,000 in closing costs in exchange for a 3.575% interest rate.

-With the 3.575% interest rate, your monthly mortgage payment increases by $165 for a new total of $3,058.60

In this example, it’s up to you as the borrower to decide whether you want to save $165 on your monthly payment or save $10,000 on closing costs. Let’s break down both saving options to help you decide which is potentially better for your scenario. 

-Take the lender credit amount and divide that by the monthly payment difference to determine the breaking point for the term length.

-$10,000 divided by $165 = 60 months or 5 years

-If you plan on keeping the loan for longer than 60 months, lender credit is the more expensive option long term. 

-If you plan on keeping the loan for less than 60 months, lender credit is the cheaper option. 

Bottom Line

Before you accept a lender credit offer, determine the breaking point if you keep the loan both long term and short term. If you have an FHA loan, you’ll probably refinance to conventional in 2-3 years to remove private mortgage insurance (PMI). If you have a conventional loan, you might keep the loan longer than the breaking point. Overall, the best option depends on your loan scenario and what your lender can offer to help cover closing costs. 


If you’ve ever wondered why lenders have different interest rates, look no further! The truth is, rates vary in small amounts depending on the cost of creating a loan. Even lenders who work at the same company often have different interest rates. At the end of the day, all home buyers are trying to buy a home and all lenders are trying to close a loan. Let’s break down what costs are factored into giving a borrower a mortgage loan. 

The Cost of Creating a Loan

#1 Verification

Every lender will either need to build, buy, or rent a software license that verifies a borrower’s background and other information to see if they qualify for a mortgage loan. 

#2 Processing

Next, lenders work with an underwriter or processor to make sure banks are taking good loans that are profitable. They also make sure that payments are being made and on time. 

#3 Space

If a mortgage company is in a nice office building in a nice area, they have to cover the cost to rent that space. 

#4 Commission 

Lenders working from a call center usually offer lower rates but make little commission. This is because their company spends money getting buyer phone numbers which is also then factored into the cost. Lenders referred by a realtor are typically self generating loan officers that offer higher interest rates because they make more commission than call center loan officers. Self generating loan officers also might have an assistant which is factored into the cost. 

#5 Company Size

Lastly, a lot of mortgage companies have branch managers, district managers and regional managers under the owners who are shareholders. These people have to get paid from the loans and essentially a borrower’s mortgage payment which is another cost. 

Bottom Line

These are all costs the mortgage company has to pay whether a borrower closes a loan or not. If a company has high closing numbers, they will likely offer lower interest rates. If a company has low closing numbers, they will have to cover the costs by offering slightly higher interest rates to maintain profitability. It all depends on how much it costs to operate their company and how much commission the loan officer needs to make.

When it comes to buying a home, getting the lowest interest rate possible is essential to maximizing your long term and short-term budget. Locking in the lowest interest rate means you pay less interest over the duration of the loan and pay more money towards the principal amount. It’s important for home buyers to fight for the lowest rate, which means paying more out of pocket in order to benefit long term. However, the cost to pay down the interest rate is pretty hefty. Let’s see if the interest rate juice is worth the financial squeeze!

Par Interest Rate 

When you ask a lender for an interest rate, they will typically answer by providing a “par interest rate” which is the lowest rate they will offer you without charging you for it. If you lock in a rate lower than the par interest rate, then the lender considers it a loss. If the loan is considered a loss, you end up paying origination or discount points in order for the bank or lender to maintain profitability. 

The Five Factors of Buying Down the Rate

The cost is calculated based on five factors:

#1 Your mortgage scenario

Banks and lenders will determine the amount based on risk assessment. 

#2 Bank or lender 

It’s important to shop your mortgage because all mortgage lenders offer slightly different rates.

#3 Par interest rate

Remember, this is the rate a mortgage lender or bank gives you based on your scenario, risk, cost and commission they need to secure and profit from the loan. 

#4 Mortgage points

Mortgage or discount points are what a bank or lender will charge you to give you a rate below their par interest rate. It’s basically a built-in cost the bank charges you to buy down the rate and maintain profitability. 

#5 How much the market pays banks to buy the rate that day

Connect with your lender on a weekly basis to see where rates are at. Rates can change by the minute, day or week.  You can shop for lower interest rates during the home buying process all the way until you’re in escrow and lock the loan. 

How Much Does It Cost Buy Down the Rate?

This depends on the five factors listed above. However, you can get a general idea of how much you might pay by calculating the cost of a mortgage point. Remember, every bank or lender varies with how many points they will charge for giving you an interest rate that’s lower than par. Let’s break down how to calculate the most commonly charged mortgage points. 

50 basis points= 0.5%

75 basis points= 0.75%

100 basis points (1 point) = 1%

150 basis points= 1.5%

200 basis points (2 points) = 2%

In order to factor the cost and points together, you will need an exact loan amount on a loan estimate provided by your lender. 

Here’s an example scenario: 

  • Your lender offers you a $400,000 loan amount and a par interest rate at 3.25%.
  • You want a 3% interest rate before market rates start to rise. 
  • Your lender charges 150 basis points (1.5%) for the difference between the par interest rate (3.25%) and the interest rate you want (3%).
  • To calculate your out-of-pocket payment, take your loan amount and multiply it by the given basis point percent.
  • $400,000 X 1.5% = $6,000 rate charge 

Here’s an example for 100 basis points (1%):

  • $400,000 X 1% = $4,000 rate charge

Here’s an example for 50 basis points (.5%):

  • $400,000 X .5% = $2,000 rate charge 

Bottom Line

Depending on your loan scenario, your lender will charge you to buy down your rate with mortgage points based on percentage or basis points calculated from your loan amount. Don’t forget to shop your mortgage with different lenders, it’s the easiest way to potentially save thousands of dollars when buying a home!


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