When you apply for a mortgage, the upfront closing costs—covering fees like appraisal, title insurance, and attorney costs—can sometimes feel overwhelming. A premium pricing rebate, commonly called a lender credit, is a helpful option to manage these costs. In exchange for accepting a slightly higher interest rate than the par rate (the standard market rate with zero points), the lender provides you with a credit applied directly to your closing costs.

This credit is typically disclosed on your Loan Estimate in Section J, labeled “Lender Credits,” showing transparently how much the lender offsets your closing expenses (Source: Consumer Financial Protection Bureau).

For example, if your closing costs are $7,000, a lender might offer a credit of $5,000 if you agree to a 0.25% higher interest rate. This means you only need to bring $2,000 to closing, but your monthly mortgage payments will increase slightly due to the higher rate.

Premium pricing rebates differ from discount points, which are upfront fees paid to lower your interest rate. The choice between them depends on your financial situation—whether you want to reduce upfront cash or lower long-term payments.

Borrowers who have limited cash reserves or plan to move or refinance within a few years might find lender credits especially beneficial. They allow homebuyers to preserve cash for other needs while easing the burden of closing costs.

Historically, such credits were known as Yield Spread Premiums (YSP), but regulatory reforms following the 2008 financial crisis improved transparency and shifted the terminology to lender credits.

For further understanding, you can learn more about Mortgage Closing Costs and Mortgage Points, which cover how lender credits and discount points function in detail.

FAQs:

  • Is a premium pricing rebate the same as a no-cost mortgage? Not exactly. A no-cost mortgage means lender credits cover all closing costs, but the cost is recouped through a higher interest rate.

  • Can I choose the credit amount? Often yes, lenders offer different rate-credit combinations.

  • Is the rebate taxable? Generally not, as it reduces your loan costs rather than being considered income, but check with a tax professional.

Sources:
Consumer Financial Protection Bureau
Investopedia on Yield Spread Premium