Yesterday, we recommended Lender Credits for closing costs for borrowers who are tight on cash. We pointed out how such credits result in higher rates, but we failed to mention the effect on a mortgage payment.
Our borrower yesterday had a loan of approximately $400,000. If she locked in a rate of 3.75%, with a $2,500 lender credit, her Principal and Interest payment would be $1,852 per month. If she instead took a rate of 4.125% to get a credit of $8,500, her payment would be $1,939 per month.
In other words, increasing her payment by $87 earns her an additional $6,000. She would have to keep her FHA loan almost 69 months (just under 6 years) to justify taking the lower rate (and smaller credit). I have yet to ever see a borrower keep an FHA loan 6 years; they almost always refinance in a year or two to get out of MI.
Message: FHA Borrowers should almost always opt for a higher rate and lender credits for closing costs.
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