What are "negative points" on a mortgage?
Short Answer:
Negative points are an infrequently used term for a lender credit. Mortgage points are a one-time fee paid at closing to get a lower interest rate. Negative points are a credit a mortgage lender gives to clients for taking a certain rate. The credit is a percentage of the loan amount and can change daily.
Longer Answer:
Negative points, also known as rebate points or lender credits, are essentially a way for borrowers to reduce their upfront closing costs in exchange for a higher interest rate on their loan. When you opt for negative points, the lender provides a credit to cover some or all of your closing costs. However, this credit comes at the price of a higher interest rate over the life of the loan.
How Negative Points Work
- Higher Interest Rate: By choosing negative points aka a lender credit, you agree to a higher interest rate than you might otherwise qualify for. This means that while your initial out-of-pocket expenses are lower, your monthly payments will be higher due to the increased interest rate.
- Lender Credit: The lender provides a credit that can be applied toward your closing costs. The credit is a percentage of the mortgage loan amount. This can be beneficial if you are short on cash for the upfront costs associated with obtaining a loan.
- Trade-Off: The key trade-off with negative points is between upfront costs and long-term interest payments. Borrowers need to carefully consider whether the immediate savings on closing costs are worth the higher interest payments over the life of the loan.
Pros and Cons of Lender Credits
Pros:
- Lower Upfront Costs: Lender credits can significantly reduce or even eliminate your closing costs, making it easier to secure a loan without a large initial cash outlay.
- Immediate Savings: For borrowers who need to conserve cash for other expenses, lender credits can provide immediate financial relief.
Cons:
- Higher Interest Costs: The higher interest rate means you will pay more interest over the life of the loan. This can add up to a substantial amount over 15, 20, or 30 years.
- Increased Monthly Payments: The higher interest rate results in higher monthly payments, which can reduce your buying power.
When to Consider Lender Credit
Lender credits might be a good option if:
- You are short on cash for closing costs and need to minimize your upfront expenses.
- You plan to sell or refinance the property within a few years before the higher interest payments accumulate significantly. The break-even point is taking the amount of the lender's credit and dividing it by the amount of the higher mortgage payment. This is the amount of months of paying the higher mortgage payment will take to equal the lender credit.
- You have other investments or financial obligations that require your immediate cash reserves. For example, you plan on using cash to renovate the property you are purchasing and need cash to pay for it.
Important to note, that lender credits can only be used to offset closing costs and prepaid. They can not be used towards a down payment or reserves.
Conclusion
Negative points aka lender credit can be a useful tool for borrowers who need to reduce their upfront costs when securing a mortgage. Taking a higher interest rate and getting a lender credit might be a better solution than a lower interest rate. However, it’s essential to weigh the break-even point's immediate benefits against the long-term costs of the break-even point.
Have additional questions about lender credits, I am happy to answer them. Reach out to me at teamjd@mainstreethl.com
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This blog is for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.