When the rebate is credited to the borrower it can be used to defray loan settlement costs. This is typically known as a no-cost mortgage. The amount credited to the borrower may not exceed loan settlement costs, and may not be used as part of the down payment.
Negative points provide a way for borrowers with little or no money to pay the settlement costs and obtain a mortgage. However, the true economics of using negative points will depend on the borrower's time horizon.
If the borrower intends to hold the mortgage for a short period of time, it can be economical to avoid upfront costs in exchange for a relatively higher interest rate. If the borrower intends to hold the mortgage for a long period of time, it is most likely more economical to pay upfront settlement costs in exchange for a relatively lower interest rate.
Investment dictionary. Academic. 2012.
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