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MAILBAG

April 24, 2005

$5,000 credit for obtaining a mortgage isn't cost free

I sold my previous home and will be able to pay, in full, for my new home.

I was encouraged to fill out loan papers at the time I committed to purchasing the home. I was encouraged to take out a loan with one of the "builder-approved" lenders because I would receive $5,000 credit. At the time, I was unsure whether I would have enough to pay for my home.

I filled out the paperwork and can "borrow" as little or as much as I like and pay it off soon after and still receive the $5,000 incentive.

Should I do this? Is there any hidden cost to me? It is not clear to me how the lender makes money on this deal. It was explained to me that it would cost me nothing. Please advise me.

Some new homebuilders offer a closing-cost credit to buyers who use mortgage and title companies that are affiliated with or recommended by the builder.

The builder benefits from this arrangement by making sure that the loan process and settlement are handled efficiently. When the builder has an ownership interest in the mortgage company or title company, the builder also benefits with a share of the firm's profits.

Whoever told you that obtaining a loan "will cost you nothing" is mistaken. There are costs associated with the loan. These costs should have been estimated for you on the lender's good faith estimate. It is likely, however, that these loan costs are less than $5,000. So, you may still benefit from a portion of the $5,000 credit.

Should you decide to take a loan, make sure that there is no prepayment penalty. Since you intend to pay off the loan within a short time, you should also consider an adjustable rate mortgage (ARM), which carries a lower initial interest rate.

As long as the loan has no prepayment penalty, you can pay it off at any time. The lender will retain the loan origination fee and processing fee, and you will get the $5,000 credit.

As an alternative, you can ask the builder to give you the $5,000 credit because you are paying cash for the home. The builder may be willing to do this. If the builder agrees, your real estate agent should prepare an addendum to the contract, stating that a credit will be allowed.

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