Good Deal on Lender Credit?

[Salley Smith]

I am buying an REO HUD home for 210,000 with 10,000 (5% down) on a conventional renovation loan. My lender told me I would receive a lender credit of $1,250 at 4.375% vs. no lender credit at 4.25%. I went with the lender credit, since it would take 6.5 years to break even (the point where the lender credit would no longer be worth it because of the amount of interest I would have paid). She is now changing that lender credit to $750, and saying that she never remembers the previous conversation. It appears she misspoke, because even the documents she had previously sent me included the $750 number, which I hadn't noticed. I am not sure if this new lender credit is worth it- the break even point is just a little under 4 years. Please advise if you think this .125 percent rate difference is or isn't worth the $750. Thanks for your time.

[Chris Mason]

Originally posted by @Salley Smith:

Ok, thank you. I understand.  One percent of my loan is $2,000 which means that each point is worth 20 dollars. She is giving me 38 points upfront ($750) for an increase of .125 percent in the rate, which is in your opinion a good deal. So, 38 points is about average for a rate increase of .125 percent? I don't know how long we will be staying in this house, but probably for at least 3 years, probably more. Additionally, closing costs are adding up, and I already did all my calculations with the $1,250 dollar credit. I am a little upset that the credit is so much lower than I was initially told, and now have to decide ASAP which choice to make. Thanks again for you help.

 No-no. 

38 bps to take a rate 1/8 higher is a BAD deal. 

Lowering the rate by 1/8 at a cost of only 38 bps is a GOOD deal.

That's why I think you should take the lower rate, and while you're at it ask how much to go even lower.