A simple guide to lender credits, buy-down points, and seller concessions.

If you’re buying a home, you may hear terms like lender credits, buy-down points and seller concessions. Each can affect your upfront costs, monthly payment and overall affordability. Here’s what they mean and how they may help you reach your homeownership goals.

Lender Credits: Lower costs now, slightly higher rate.

What it is:
Lender credits are what happens when your lender pays some or all of your closing costs. They are a pricing trade-off: the lender offsets costs in exchange for a higher interest rate. In short, they’re a way to reduce cash to close by accepting a rate adjustment.

How it works:
In return for lender credits, your loan has a slightly higher interest rate. The amount of lender credits can vary by loan program, credit profile, and market pricing.

Why it can help:

• Reduces the cash due at closing
• Helps you keep more money for moving, repairs or savings

Things to know:

• Availability varies by lender
• The amount offered can depend on credit score, income and loan program

“Lender credits can be a helpful option for buyers who want to keep more cash available for moving expenses, home updates or emergency savings,” says Max Vosburgh, director, mortgage secondary marketing and risk, Commerce Bank. “The key is understanding the trade-off between lower closing costs today and a potentially higher monthly payment over time.”

Buy-Down Points: Pay more now, save over time.

What it is:
You pay an upfront fee (called “points”) to reduce your interest rate for the life of the loan. These are also known as discount points. A Commerce Mortgage Banker can help estimate the break-even period and total savings from buy-down points. They’ll calculate your number twice — once with points and once without — and will show you the monthly payment difference from buy-down points.

How it works:

• 1 point usually equals 1% of your loan amount
• Buying points can lower your monthly mortgage payment

Why it can help:

• Reduces total interest paid over time
• Makes monthly payments more manageable

Things to know:

• Works well if you plan to own the home for several years
• There’s a “break-even point” when the interest savings begin to exceed the upfront cost

“When considering discount points, one of the most important questions is how long you expect to stay in the home. The longer you keep the mortgage, the more opportunity you have to benefit from the lower interest rate,” according to Vosburgh.

Seller Concessions

What it is:
A seller concession is when the seller pays certain buyer costs, like closing costs or fees. Seller concessions are negotiated in the purchase contract and are applied toward allowable closing items.

How it works:

• Seller concessions cannot be used for the buyer’s down payment on a conventional loan; they are limited to closing costs, prepaid items and points when permitted
• There are limits based on the loan type (FHA, VA, or conventional) and occupancy
• Following the loan rules helps keep the process on track

Why it can help:
It lowers the cash required at closing, which can make buying more affordable right away. Seller-paid closing costs can include title fees, lender fees, escrow deposits and in some programs, discount points.

Things to know:

• Your real estate agent can coordinate with the seller’s agent to explore options.
• In a competitive market, seller concessions may be part of the negotiation.