First-time homebuyers often have a difficult time transitioning from renting to owning. Up-front closing costs — like origination charges, prepaid interest and a down payment — add up quickly, presenting a barrier to homeownership for even the most financially prepared renter.
Enter RocketRentRewards from Rocket Mortgage.
“Many renters feel like homeownership is out of reach — especially as they try to save money to take to the closing table,” says Bill Banfield, Rocket Mortgage economist and chief business officer, in a statement. “RocketRentRewards eases those concerns by rewarding clients for simply doing what they do every month, making their rent payment.”
RocketRentRewards seems like an innovative solution to the lack of housing affordability in today’s economic climate, between stubbornly high home prices and mortgage rates. But is it too good to be true?
Clever marketing aside, RocketRentRewards is essentially a credit toward closing costs, and plenty of mortgage lenders offer this type of incentive for first-time homebuyers. Keep reading to learn more about Rocket’s program, lender credits in general and how to compare mortgage offers.
[Read: Best Mortgage Lenders]
What Exactly Is a Mortgage Lender Credit?
Bringing sufficient cash to close is a hurdle for many homebuyers, especially first-timers. Mortgage lenders may offer credits or grants that can be used to help cover a buyer’s up-front closing costs. Rocket Mortgage is not the first or only mortgage lender to entice buyers with closing cost assistance — Bank of America, Chase and Wells Fargo, for example, have their own offerings.
However, the financial incentive of mortgage lender credits may be offset by higher mortgage interest rates. In other words, while a lender credit may help you afford the up-front costs associated with buying a home, it could make it more expensive to repay your loan over time if you end up with a higher mortgage rate.
This is a trade-off that many first-time homebuyers may be willing to consider. After all, renters who don’t already own a home can’t tap into equity to use toward the down payment on their next home like repeat buyers can do.
That’s why it’s important to consider other factors when choosing a loan offer, such as interest rate, repayment term and application fees.
Doing the Math: How Much Can Renters Save?
With the RocketRentRewards program, homebuyers can earn 10% of the rent they’ve paid over the past 12 months in homebuyer credits, up to $5,000. However, your rent would have to be at least $4,167 per month ($50,000 per year) to max out the $5,000 credit — and most renters pay far less than that.
The average rent in the U.S. is around $1,600 to $1,800 per month, according to research from real estate platforms Apartments.com, Redfin and Zillow. That would theoretically earn a renter between $1,920 and $2,160 in closing cost credits, far below the maximum threshold of $5,000.
To estimate how much your rent could earn under RocketRentRewards, add up your rental payments over the past year or multiply your monthly rent payments by 12 (assuming your rent hasn’t fluctuated over the past year). Then, multiply your total rent over the past 12 months by 0.1 (or 10%) to see how much credit you could possibly unlock.
[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]
Is RocketRentRewards Worth It?
The RocketRentRewards offer from Rocket Mortgage may be worth considering if you’re a renter who’s eligible for some or all of the credit, but consider the big picture. That up-front lender credit could come with a higher interest rate or more costly up-front fees when compared with other loan offers.
When you get preapproved with mortgage lenders, you’ll receive a rough estimate of how much house you can afford and what your interest rate may be. With most lenders, you must have an accepted offer on a home before you can lock in your mortgage rate, formally apply for the loan and receive your loan estimate. Your loan estimate disclosure provides far more financial details about your closing costs. Some lenders do offer the option to “lock and shop” your interest rate. That would allow you to secure your rate for a period of time, but the rate may be higher.
With loan estimates from multiple lenders in hand, you can make a more evenhanded comparison of your various options. You can find any lender credits or homebuyer grants at the bottom of Page 1 of your loan estimate under the “costs at closing” section, with a detailed breakdown on Page 2.
Don’t just compare lenders for the credits they offer. You’ll also want to weigh the loan costs charged by the lender, including origination charges as well as application and underwriting fees. And be sure to look at your loan’s annual percentage rate, or APR, which gives a more holistic picture of borrowing costs than the interest rate alone. The mortgage APR is on page three of your loan estimate.
Check out this sample loan estimate from the Consumer Financial Protection Bureau so you can learn how to shop for a mortgage like a seasoned pro.
[READ: Compare Current Mortgage Rates]
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Rocket Mortgage Will Convert Your Rent Payments Into Homebuying Credit originally appeared on usnews.com
