When you build a house, you have the choice of many different lenders. Among those choices, is the builder’s lender. In some cases, using this lender can net you some pretty great benefits on your home. Certain builders give closing cost credits or credits for home upgrades when you use their mortgage lender. Is it always the right choice, though? We take a look at the pros and cons below.
Pro: There’s a Working Relationship
The builder and your bank must work together. If you use the builder’s lender, there’s a built-in relationship. You don’t have to worry about getting everything done smoothly. The lender and builder already work closely together. It could make for fewer hiccups throughout the process.
Pro: The Builder Provides Incentives
As discussed above, many builders provide incentives for you to use their lender. They make it look like you are getting a great deal by crediting your closing costs or giving you free upgrades. If you think about it, though, they are making the money on the interest you pay on your loan.
Pro: Less Confusion With the Builder’s Lender
Building a home means a lot of back and forth with paperwork. If there’s a homeowner’s association, you may have to get the association approved before you can close on your loan. If you use the builder’s lender, all information is there and ready for the lender. If you use an outside lender, you are responsible for getting the required information in order to process the loan.
Con: Rates or Fees May be Higher
Depending on the concessions the builder provides, you may pay a higher interest rate to make up for the credit. For example, if the lender gives you free upgrades, he needs to make that money up somewhere. He’ll likely do it in the interest rate or fees.
Con: The Builder Could Increase the Sales Price
Sometimes builders jack up the price of the home in order to entice you to use their lender. You won’t know the price is higher, though. They give you a quote for the home’s price based on using their lender. They then make it enticing by providing the incentives. You don’t realize you are paying an inflated price for the home. You just think you are getting a good deal.
Con: You Get Fewer Choices
When you shop around for different lenders, you often have several loan programs you can use. You get to choose amongst the lenders to find the best deal for yourself. When you use the builder’s lender, you are stuck with whatever program they offer you. There is no shopping around.
What Should You Do?
The bottom line is that only you know what is right. The best thing to do is shop around. Listen to the builder’s offer, but also find out what other lenders will give you. Ask for a Loan Estimate from every lender. Then you can sit down with the offers and determine what works best. Look not only at the interest rate, but also at the fees and the APR. You want to know what the loan will cost you over its entire life.
If you focus on interest rates alone, you’ll likely take the loan with the lowest rate. What if that loan has much higher fees? You may end up paying more for the loan in the long run. Don’t get blindsided by lower rates or even builder incentives.
Look at everything in writing and decide what is right for you. What if you paid for the extras the builder will provide if you use his lender? Would it cost you less to use another lender with a lower interest rate? You must consider these factors.
In the end, it comes down to which mortgage lender will approve you and how much it will cost you. Talk with several lenders and take your time making your decision. The builder can’t force you to use their lender. It’s your choice. Remember, you are the one paying the bill for the next 30 years.