The Ultimate Guide to Free Refinancing and Lender Credits

Introduction: The Myth of a Free Refinance

Have you ever heard about a free mortgage or a free refinance? If so, you might be skeptical. After all, banks don’t just give away money, right? Yet, many homeowners—including our very own Jeb Smith—have been able to refinance their mortgages twice without bringing any money out of pocket or rolling costs into their loans. How is that possible?

In this guide, we’re breaking down lender credits—how they work, when they make sense, and how they can help you save thousands on your next mortgage refinance or home purchase. Along with mortgage expert Josh Lewis, we’ll cover discount points, par rates, lender credits, and when it makes sense to buy down your interest rate.

By the end of this guide, you’ll know exactly how to make smart mortgage decisions and avoid getting trapped by misleading loan offers. Let’s dive in.

Understanding the Basics: Par Rates, Discount Points, and Lender Credits

What Is a Par Rate?

A par rate (or zero-point rate) is the interest rate a lender offers without any upfront cost to you. You don’t pay extra to get it, but you also don’t receive any credits. Think of it as the baseline rate that lenders expect to offer.

For example, if today’s par rate is 6.75% for a $500,000 loan, that means you neither pay extra to lower the rate nor receive a lender credit to offset costs.

What Are Discount Points?

A discount point is an upfront fee you pay to lower your interest rate. Essentially, you’re paying the lender a lump sum of money upfront to secure a lower rate over the life of your loan.

• 1 discount point = 1% of your loan amount.
• Typically, 1 point lowers your interest rate by about 0.25%.

Example:
If you pay 1 point ($5,000 on a $500,000 loan), you might lower your rate from 6.75% to 6.50%. This could save you about $83 per month, but it takes about 5 years to break even on that upfront cost.

What Are Lender Credits?

A lender credit is the opposite of discount points. Instead of paying extra upfront, you accept a higher interest rate and in return, the lender covers some or all of your closing costs.

• Instead of a 6.75% rate, you accept 7.00%.
• The lender might give you a $5,000 credit to cover closing costs.
• Your monthly payment is slightly higher, but you don’t have to pay upfront.

Should You Pay Points or Take a Lender Credit?

When It Makes Sense to Pay Points

• You Plan to Stay in the Home for 7+ Years
• You Want the Lowest Possible Monthly Payment
• Rates Are at Historical Lows
• You Have Extra Cash & Don’t Need It for Other Investments

When It Makes Sense to Take a Lender Credit

• You Plan to Refinance Again Soon
• You Need to Keep Cash on Hand
• You’re Buying a Home and Need Help with Closing Costs
• You Don’t Plan to Stay in the Home for the Long Term

Historical Trends in Mortgage Rates and Refinancing

Historically, mortgage rates fluctuate based on economic conditions. Over the past 50 years, we've seen:

• Double-digit rates in the 1980s (often exceeding 15%)
• A steady decline from the 1990s to early 2000s
• Record-low rates in 2020 and 2021, reaching under 3%
• Rising rates post-2022, climbing back into the 6-7% range

Common Questions About Lender Credits and Discount Points

Can I Combine Discount Points and Lender Credits?

Yes! You can mix them to find the best balance between monthly savings and upfront costs.

Do Lender Credits Affect My Loan Approval?

No, but they do impact your monthly payment. Lenders don’t mind giving credits if you’re taking a slightly higher rate.

Are Lender Credits the Same as Seller Credits?

No. Seller credits are concessions from the home seller to help cover buyer costs. Lender credits come from the mortgage lender.

Conclusion: What’s the Best Strategy for You?

Every mortgage decision should be based on your personal financial goals. Whether you choose to pay points or take a lender credit, the key is to run the numbers and consider how long you’ll keep the loan.

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Until then, buy right, borrow smart, build wealth.