Closing cost credit for new construction from preferred lender v/s better rates outside

Asked by Abhijith Prabhudev, Milpitas, CA Mon Aug 19, 2013

We bought a new house and sellers are paying $5000 closing cost credit if we go with their lender. The catch here is that there lender is giving us loans which is bad when compared with the rates outside. They are offering 5% where outside we can get 4.65%. We are in dilemma now if we should go with them, get the $5000 credit and then refinance outside or just go with lower rates outside and loose $5000. With the rates growing up, we are concerned if refinance would again incur some costs and by the time we lock rates for refinancing, they would be more than what they are now. Thanks in advance for the advice and appreciate your help in getting our confusions cleared.

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Eric Nelson…, Mortgage Broker Or Lender, Campbell, CA
Mon Aug 19, 2013
The challenges are simple - you want to confirm that the lender/builder has no penalty if they are paid off early, less than 6 months.

Technically you could refinance within 30 days of the purchase, thus keeping the credit of $5k and still being in the market for a much better rate.

Your alternative is doing the better rate now to eliminate risk, and if we pre suppose you do not refinance anytime in the next couple of years you get a better deal this way long term.

It is a question of how long will you keep the loan, since the longer you retain the lower rate the higher your savings are.

You could also shop with a mortgage broker to see what the market is today, and if there are any additional credits available.

Best of luck!

Eric Olfred Nelson, III
Sr. Mortgage Planner
SVC Funding
CA Bureau of Real Estate #01258488
NMLS # 120412
2 votes
Terri Vellios, Agent, Campbell, CA
Wed Aug 21, 2013
You can have a different lender run some scenarios for you. If you locked your loan with the builder's lender then you will lose the lock rate. Also, a new appraisal may be needed from your new lender and if that appraisal is under value you may have to make up the difference. The number you want to compare is the APR not the rate. Because lenders need to give you the cost of the borrowed money. They all have certain fees, underwriting, points, etc. which when factored in becomes the APR. Be sure you are comparing rates and fees and on the same day.
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1 vote
Steven Ornel…, Agent, Fremont, CA
Mon Aug 19, 2013
Hi Abhijith,

You did not provide a loan amount so here's a rough calc to use in making your decision:

If you choose the 4.625% option over the 5% option; per each $100k of loan amount, you would save a total of $8,164.80 over the life of a 30-year fixed loan.

So, if your loan amount was hypothetically $700K, your total savings would be $57,153.60.

I suppose you could take the 5% to get the $5k credit and then refi; however, you take on the risk of increasing mortgage rates and the escrow costs of doing so.

1 vote
Claudia Mull…, Mortgage Broker Or Lender, Fremont, CA
Mon Aug 19, 2013
Yes this is a problem.
Basically that $5000 that is being offered to you is resulting in a higher interest rate.
You do need to do the math.
I have had clients who are trying to get the best rate, but are focused on the credit from the lender. As you shop, you will see that any lender can give you a credit for $5000 (depending on loan amount( and probably match the rate of the 'preferred' lender.
Work it to your advantage.
Get the quotes both ways from the outside lending sources.
Remember to let the agent know, your middle credit score, the type of property (condo v. noncondo) and loan to value. These factors all effect your pricing.
What size loan are you looking at?
What are your credit scores?
Is it a condo?
Let us know!
0 votes
Walter 'Skip'…, Agent, Brea, CA
Mon Aug 19, 2013
Make sure there are no prepayment penalties on the builder's prefered lender before deciding.
Good luck,
0 votes
Tina Lam, Agent, San Jose, CA
Mon Aug 19, 2013
You should discuss this with your Realtor, since there are many factors involved.
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