Increasing Interest Rate to get a closing credit

[Derek Luttrell]

Hey Everyone, 

I am closing on my first purchase in about a week. I am house-hacking a 3-bedroom condo in Chicago by having 2 roommates each pay me $900/month+ utilities while I'm in the master. 

This might be a no-brainer, but yesterday my lender told me that if I increase the interest rate from 4.125% to 4.250%, they will give me a $1,290 closing credit, and this will increase the monthly payment by about $20/month. Is this worth it,or is this a sales tactic by the lender that's really just a bigger benefit for them? 

I'm buying the condo for $355,000, with a $5,000 closing credit from the seller, and a 2% ($7,100) closing credit from the lender since I am a first time buyer (25 yrs old) and have an 800+ credit score. This $1,290 will be on top of the $7,100 the lender is already giving me.

My plan is to live here for probably two years, and hold the property as a rental. Thank you! 

[Nick G.]

Hey @Derek Luttrell. The answer to your question

"Is this worth it,or is this a sales tactic by the lender that's really just a bigger benefit for them?" 

... is totally up to you whether or not it's worth it. If cash out of pocket is important to you, I'd go for it. If a lower monthly is your main concern, I wouldn't.

If you were to add $1290 to the price of the house, your mortgage payment would probably only go up about $7-$10/month, so the lender credit via an interest rate bump is just a slightly more expensive way of getting the same credit. Technically, you could save that $10ish/month by simply giving the seller $1290 more for the property and then asking for a $1290 closing cost credit in return. Depends on how much trouble you want to go to for that extra few bucks.

With all of that said, for $20/month, it will take you the lender over 10 years to recoup their $1290 credit to you. Meaning you get to pay that $1290 over 10 years instead of paying it all up front on day 1.

This kind of thing totally normal, the offer from the lender is pretty standard and I wouldn't have a problem with going for it if I were in your shoes.

More importantly, huge congrats on the first purchase man!!