Free Money at the Closing Table
Free? I think not! But there are definitely “lender credits” available to you, depending on the interest rate you select. The technical term for this credit is “yield spread premium”. But is the lender passing this credit on to you, or are they keeping it – and therefore booking additional profit from your loan? This profit would be in addition to their processing fee, and results from the earnings spread they generate between what you pay them versus what it costs them to fund your loan.
The higher the interest rate you pay, the higher the credit to which you should be entitled – all of which can be applied towards offsetting your closing costs. In arriving at this credit, the lender factors in certain standard risk adjustments that are based on variables such as your credit score, loan amount, collateral type, and loan-to-value ratio. The lesson to be learned is that your lender should always fully disclose the amount of this credit – even if it is in the form of a reduced interest rate.
Recently I had a client who was able to increase his lender credit by simply taking a few steps to improve his credit score. After following a program of credit card debt reduction, his FICO score increased from 599 to 642. This favorably resulted in an increase to his lender credit of 1.25% of his loan amount – a savings of $2,500 which he was able to apply towards the closing costs on his $200,000 residential mortgage.