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 next to impossible to get an offer accepted on a home without a mortgage pre-approval in hand, or at the least getting pre-qualified with a bank or lender first, assuming you arent’t paying all cash.
Put simply, a home seller (and their real estate agent) won’t take you seriously if you can’t furnish one of those items when making an offer. They’ll want to know you’re an eligible home buyer, not just eager to buy their home.
In reality, you should be shopping for a mortgage before shopping for a home so you actually know how much you house you can afford.
Doing so will certainly narrow down your property search, and allow real estate agents to take you seriously as well. They’ll definitely ask if you’re already pre-qualified, and if not, probably suggest that you speak to their guy or gal.
Citi Homebuyer’s Advantage Comes with a Buyer Credit
- Citi is offering a credit to home buyers
- Of .75% of the loan amount
- On a $200,000 home loan we’re talking about $1,500 off closing costs
- Which could reduce your out-of-pocket expenses
That brings me to an interesting mortgage lender promo aimed at home buyers that I recently came across.
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 outside the transaction.
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.
While helpful, it would only knock out less than half of the average home buyer’s closing costs.
Lower Closing Costs or Lower Interest Rate?
- You actually get two options here
- A closing cost credit or a lower interest rate
- Assuming you apply the credit toward the mortgage rate pricing instead
- That could result in monthly savings for years to come and be even more valuable if you hold the property for a long time
So you could save $1,500 in out-of-pocket closing costs, or opt to lower your mortgage rate instead. Those are the two basic options.
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 at best.
But that’s still rather significant on a 30-year fixed-rate mortgage you plan to hold for a long time.
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 at the outset.
Can You Do Better Elsewhere?
- Like I say about all these mortgage promotions
- It’s important to look at the interest rate and total cost of the loan
- Getting a couple thousand off closing costs isn’t so great
- If your mortgage rate is higher and costs you more money every month year after year
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 an interest rate of 3.75% for the same exact 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?