Have you heard the phrase about “smoke and mirrors?” Well that phrase certainly applies to the mortgage industry in regards to your cost to obtain a mortgage to purchase a home!
In the case of your loan costs, the “smoke” is the Seller Incentive, that portion of your closing costs that the seller has agreed to pay in order to induce you to purchase their home.
The “mirrors” is what the actual “cost” of your loan is.
Let me give you an example. Assume that you are purchasing a home for $250,000 and the seller has agreed to a 2% seller incentive. That means that as an incentive for purchasing their home, the seller is going to kick in $5,000 towards your closing costs. If the total closing costs are $10,000, half of your costs, or $5,000, will be paid by the seller.
But now let’s say that you are doing a loan with No Lender Fees!
So, your lender charges are zero, and your closing costs for the other service providers such as title & escrow and the payment of your ‘pre-paid’ charges for property taxes, insurance, etc. are only $5,000. Then, the seller’s incentive covers ALL of your costs, and you’ve saved $5,000 in true out-of-pocket cash.
Don’t let the smoke & mirrors confuse you! In this example one loan cost you $5,000 in lender fees, and the other loan cost you nothing in lender fees – both to obtain the exact same interest rate!
It’s important to understand that when a seller agrees to pay a portion of your closing costs by way of a seller incentive, they’ve agreed to pay you that money regardless of how you use it.
Make sure not to burn up their incentive paying unnecessary lender charges.