If you’re currently shopping for a new home, mortgage financing should be at the top of your to-do list.
Quite frankly, it’s impossible to shop for a home without at least getting pre-qualified, let alone having a pre-approval in hand.
In reality, you should be shopping for a mortgage before shopping for a home so you actually know how much you can afford.
Doing so will certainly narrow down your property search, and allow real estate agents to take you seriously.
That said, I recently came across an interesting mortgage lender promo aimed at homebuyers.
Namely, Citi’s “Homebuyer’s Advantage,” which provides .75% of the loan amount (up to $22,500) to be used as a credit towards closing costs or reducing your interest rate.
It cannot be used to obtain cash.
They use a $375,000 loan amount for their example, which would afford you a $2,812.50 credit.
But let’s look at a $200,000 loan amount, which was what Bankrate used in their closing cost study conducted earlier this summer.
They concluded that the average closing costs were $4,070. Assuming your loan amount with Citi was $200,000, you’d get a credit worth $1,500.
Lower Closing Costs or Lower Interest Rate?
So you could save $1,500 in out-of-pocket closing costs, or opt to lower your mortgage rate.
Now it’s unclear how much you could lower your rate with their credit, but I’d guess no more than an eighth to a quarter of a percentage point.
But that’s still rather significant on a 30-year fixed-rate mortgage you plan to hold for a while.
Let’s say the standard rate is 4.25%, but the credit pushes your rate to 4.00% even.
Your mortgage payment would fall from $983.88 to $954.83, and you’d save nearly $2,500 in interest over the first five years.
So clearly taking the interest rate adjustment would be the winning move here if you plan to stay in the home longer than five years.
And chances are you will be if you opt for a fixed-rate mortgage.
Can You Do Better Elsewhere?
Of course, you may find a lower interest rate at a competing bank or via a mortgage broker that eclipses the savings from the Citi Homebuyer’s Advantage credit.
For example, say bank “X” offers you a rate of 3.75% for the same loan. That would lower your monthly payment to $926.23, and you’d save another $2,500 in interest over the first five years versus the promotional Citi rate.
So gimmicks aren’t always the way forward, especially if you can secure a lower rate (and lower closing costs) elsewhere.
Typically, these types of offers are intended to get you in the door, but don’t necessarily translate to significant savings, let alone any.
That’s why it’s imperative to shop around, because you’ll never know what awaits you if you take the first offer you see.
However, if the Citi deal turns out to be the best deal around, then more power to you.
Read more: What mortgage rate can I expect?