Refinance guide lender credits vs paying points at refinance

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Lender Credits vs Paying Points at Refinance: Which Is Right for You?

When refinancing your mortgage you’ll often be offered a choice: accept lender credits (a higher rate in exchange for the lender covering some closing costs) or pay discount points upfront to lower your interest rate. Both options reduce your out‑of‑pocket costs or monthly payment, but they suit different financial situations. This guide explains what each option is, when it makes sense, the costs and benefits, a step‑by‑step process for deciding, common pitfalls, and a short FAQ.

What each option is — and when it makes sense

What are lender credits?

Lender credits are funds the lender gives you to offset some or all of your closing costs in exchange for accepting a higher interest rate. Credits reduce what you pay at closing but increase your ongoing interest expense.

What are discount points?

Discount points (sometimes called mortgage points) are prepaid interest you buy at closing to permanently lower your loan’s interest rate. One point typically equals 1% of the loan amount and reduces the rate by a certain increment (commonly about 0.125–0.25% per point, depending on the lender and market).

When each makes sense

  • Lender credits make sense if you need to minimize upfront cash (low savings, tight budget) or if you plan to sell or refinance again in a short period.
  • Paying points makes sense if you have the cash, plan to keep the loan long enough to recoup the upfront cost through lower monthly payments, and want to lower lifetime interest costs.

Benefits and drawbacks

Lender credits

  • Benefits: lower or no out‑of‑pocket closing costs; easier cash flow at closing; good for short-term homeowners.
  • Drawbacks: higher interest rate, higher total interest paid over the life of the loan, potentially a worse APR.

Paying points

  • Benefits: lower monthly payment and overall interest; can save money over the long term; may lower the APR.
  • Drawbacks: requires upfront cash; savings only materialize after the break‑even period; points may be paid over time in a refinance for tax purposes (see Costs & Fees).

Costs and fees to consider

Both options interact with common refinance costs. Typical fees include:

  • Loan origination fees and points
  • Appraisal, title insurance, and recording fees
  • Escrow/impound and prepaid interest
  • Mortgage insurance (if applicable)

Important notes:

  • One discount point = 1% of the loan amount. On a $300,000 loan, 1 point = $3,000.
  • Points usually reduce the rate by a set increment. Confirm the exact rate reduction with your lender.
  • Tax treatment: mortgage points on a refinance generally must be deducted over the life of the loan rather than all at once. Tax rules are complex—consult a tax advisor for specifics.

How to decide: step‑by‑step process

  • 1) Gather multiple offers. Request quotes with both lender credits and discount points so you can compare apples to apples.
  • 2) Note the rate, credits (dollar amount), points, and closing costs for each offer. Use the lender’s Closing Disclosure to verify numbers.
  • 3) Calculate your monthly payment under each scenario. Lower rate = lower monthly payment; higher credits = lower cash required at closing.
  • 4) Compute the break‑even period for points:

    Break‑even months = (Cost of points) ÷ (Monthly savings from lower rate)

    Example: $3,000 in points reduces payment by $60/month → 3,000 ÷ 60 = 50 months (~4.2 years).

  • 5) Compare the break‑even period to how long you expect to keep the loan (time to sell or refinance, or how long you’ll stay in the house). If you expect to keep the loan longer than the break‑even period, points can be worthwhile.
  • 6) Consider APR. APR reflects rate plus upfront costs and offers a standardized way to compare loans with credits vs points.
  • 7) Negotiate. Ask lenders if they can move along the rate/credit spectrum to give you a more favorable balance.
  • 8) Lock the rate and review the Closing Disclosure carefully before closing to confirm the agreed credits/points and fees.

Common pitfalls to avoid

  • Focusing only on monthly payment without calculating break‑even for points.
  • Assuming lender credits cover all closing costs — credits may not cover prepaids or escrow reserves.
  • Confusing discount points (lower rate) with origination points (fees for the lender). Ask the lender to itemize.
  • Ignoring APR — a loan with credits might look cheaper at closing but have a higher APR over time.
  • Not confirming how points are reported for tax purposes or failing to document them for potential deductions.

Short FAQ

Q: How do I calculate whether points are worth it?

A: Calculate the cost of the points (loan amount × points %) and divide by the monthly savings from the lower rate. If the break‑even period is shorter than the time you expect to keep the loan, points can be worthwhile.

Q: Do lender credits raise my interest rate?

A: Yes. Lender credits are offered in exchange for accepting a higher interest rate. The lender effectively pays you up front by charging more interest over time.

Q: Can lender credits cover all closing costs?

Not always. Credits can be applied to many closing costs but may not cover prepaids, escrow reserves, or certain third‑party fees. Confirm specific line items with your lender.

Q: Are discount points tax deductible?

Points may be tax deductible, but rules differ for purchase vs refinance and change over time. For refinances, points are often amortized over the life of the loan. Check with a tax professional.

Choosing between lender credits and paying points depends on your cash at closing, plans for the property, and how long you’ll keep the loan. Run the numbers, compare APRs, and shop multiple lenders to find the right balance between upfront cost and long‑term savings.

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