Upon submitting your mortgage application, you will receive a loan estimate which includes a breakdown of all fees/costs associated with your loan. Some fees may be self-explanatory, such as credit reports or appraisal fees, while others may need more understanding of what they mean on your loan estimate. Let's break down two of them.

Below we define lender credits and discount points: Keep in mind, both lender credits and discount points are essentially the same - a cost to the borrower to get something in return.

Lender Credits: This option allows you to buy down your closing costs in exchange for a higher interest rate. If you are a borrower who makes a good income but has little to no down payment or maybe you prefer to keep your extra money in the bank and invest elsewhere. In either of these scenarios, lender credits could be a good option. Typically, each lender credit will equal 1% of your loan amount for an increase in the rate but - the rate increase can vary from lender to lender, mortgage type, and overall market conditions. On your loan estimate, the lender credit may show as a negative number, you will also see the higher interest rate in return for the discounted closing costs.

Discount Points: These points allow you to buy down your interest rate. Interest rate buydowns are a common choice for borrowers looking to lower their monthly payments and don't mind paying additional closing costs to obtain the lower rate. In this scenario, you pay more upfront for the benefit to pay less over time. Each discount point typically costs 1% of the loan amount in exchange for a discount in rate. Like lender credits, the discount can vary from lender to lender. These points will show on your loan estimate, reflecting the higher closing costs and lower interest rate.

Bottom line: In either case, consult with your loan officer who can provide the best guidance based on your individual needs. There are always costs associated with a mortgage and no way to get around it. Lender credits and discount points can give you flexible options for rates and closing costs.

Source: Mortgage Market Guide