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A mortgage rebate is a cash payment made to a borrower for accepting a home loan with certain terms.
The two main reasons for lenders or brokers to offer mortgage rebates is:
- To beat a competitor’s rate
- To offset the terms on a loan that don’t seem favorable to a borrower
If two housing loans have the same interest rates and points, the one with the cash rebate would seem more attractive to the borrower.
At the same time, if a loan is at 5% while another is at 4.75%, a borrower might be enticed to take on the first loan if it comes with a $2,500 cash back.
Mortgage rebates can come in various forms. The most common of which are:
- Negative points
- Closing costs credit
- Cash payment
Because of the potential of mortgage rebates being abused, some states fully or partially outlaw such business practices.
This is because an average homeowner might be seduced by the easy cash without realizing that he would be paying more than the rebate amount in the long term.
However, various states have no problems allowing it either.