|
No Closing Costs, What's the
Catch???? No Closing Costs, What's the Catch? - No Closing Cost home loans are advertised to borrowers all the time. This may sound like a good deal. However, borrowers may want to investigate a little further because it could cost them thousands of dollars over the life of the loan. How long do you plan on living in your new house? If you expect your stay to be shorter term it is probably to your advantage to accept the higher interest rate in lieu numerous out of pocket closing costs. The no closing cost loan is typically used in situations where the home owner plans on selling the home in a short period of time. The negative impact from the higher interest rate from a no closing cost loan will not have much effect over a short period of time. Investors are also a group of borrowers that use no cost loans since they will own the home for a short time. No closing costs can also be obtained by seller's concessions and other seller's assistance. Sometimes one can even play with the purchase price so the seller isn't losing any money on the deal but assisting the buyer to get into the home with as little money as possible. One major factor in determining if a no closing cost loan makes sense is whether you are doing a purchase loan or a refinance loan. On a purchase loan all of the points you pay are tax deductible in that year. In addition, often you can have the seller "carry back" some of your closing costs - that amount is added to the sales price you agree on. In this way you can easily buy down the rate on your mortgage and still not have out of pocket expenses.
On a refinance the tax advantage for the points you pay on a loan are spread out over the life of the loan. Because of this it may make sense, depending on some of the above factors, to do either a no cost or a no points loan. A good mortgage consultant should be able to give you a long term analysis that will give you a break even point to let you know whether it would be best for you to pay the higher interest rate with no closing costs, or to pay the closing costs with a lower interest rate. "No Closing Costs" certainly sounds attractive. However, most mortgage professionals can structure your mortgage so their is little or no money out of your pocket. If "no closing costs" is important to you, let your mortgae profesisonal know. Generally, no closing cost loans come with a higher interest rate.
Lenders are often able to offer a rebate in exchange for a higher interest rate. With a no closing cost loan, this rebate can be used to absorb costs typically associated a new mortgage. It is important to remember nothing is free. There are benefits for establishing your mortgage with a "No Closing Cost" loan. It will be important to review your options and goals with your mortgage professional to help determine if structuring your loan with or without closing costs is beneficial. No closing costs can be accomplished several ways. One way is with the lender giving a yield spread premium (check your Mortgage Loan Disclosure Statement). Another way is when purchasing the property to have the seller pay for the closing costs. Several lenders will allow the seller to pay 6% towards your costs. A third way would be to get your own real estate license. You act as your own agent. This gets you typically 2.5 - 3% of the purchase price in a commission. Use this money to yourself back for any costs you incurred up front. These are just a few of the ways to avoid paying for closing costs.
Take the time to speak with a mortgage professional and discuss your options. It could save you thousands. If you are planning to own your home for an extended period of time, you should bear in mind that the No Closing Cost option on a mortgage comes at the expense of a higher interest rate. Over the years, the higher rate of interest you pay with the No Closing Cost option may actually cost more than the closing costs would have cost. While the interest you pay on your mortgage may be tax-deductible, you still must decide whether or not you are comfortable with the payment on a No Closing Cost loan - it may just be that other options are more affordable and make more financial sense for you, both now and in the future. No Closing Cost Loans - You will have an interest rate that is slightly higher than the rate available for a mortgage loan where you pay closing costs, points, and fees. A "No-closing cost" loan might be suitable if you plan on holding the mortgage note for a short time or if the difference in payment and rate between a "no-closing cost" loan and standard fee loan is minimal. Even when obtaining a no closing cost loan if you are escrowing for your taxes and insurance, you will still either have to bring money to close to set these up or increase your loan amount and roll this money into the loan to set up your tax and insurance escrows. Therefore, in addition to minor items such as recording fees and such that you may still need to pay for you will have to account for money to set up escrow accounts for your property taxes and homeowners insurance. Depending on the time your taxes and insurance are due this can get somewhat high or be very low. Keep in mind that "No Closing Costs" is not exactly the same as "No Costs". Depending on the lending banks, some may require the home buyer to pay for appraisal, county recording, mortgage taxes, real estate taxes, pre-paid interests, etc. Always inquire about what specifically are the banks paying on your behalf. A detailed Good Faith Estimate provided by the lending banks can often paint a clearer picture as to what the true costs are. No closing cost loans are advertised as a mortgage loan with no cost to you. This is only true for the upfront cost. You will be paying those cost at a much higher interest rate which generally will cost you much more over time than if you would have just taken the lower rate with closing costs. If you are considering a no closing cost option, ask your loan officer about such topics as mortgage insurance & title fees. Ask your mortgage professional to show you the mathematical equation for how long it would take you to "break even" with a standard loan program that you are comparing to a no closing cost loan. If you save $50 per month on a no closing cost loan that should have $5,000 worth of closing costs, it would take you over 8 years to "break even" by paying the closing costs up front. You may actually be able to effectively get a no closing cost loan, by getting the closing costs paid for by the seller, with seller paid concessions. If the seller agrees to pay 3% closing costs, you may get the same loan with a small increase in the loan amount, but no increase in the interest rate, providing the appraisal will allow for the increase in price. If you plan to hold on to the property for any length of time, it would be well worth it to raise the price by a few thousand dollars, instead of paying a higher interest rate. The implication in the advertising of no closing cost loans from some lenders is that the lender is simply “giving away” or not charging for the closing costs. Nothing could be further from the truth. You will pay for these costs in one form or another and an honest, competent mortgage professional such as myself can clear the smoke and mirrors from such advertising. There is no such thing as a free mortgage. There are people involved with every mortgage transaction. Those people must be paid. If your not paying any closing costs then your paying a higher rate. Often no closing cost loans are contingent on higher rates or the seller gives a credit. Beware of the lenders that also offer no lender fees or extremely low lender fees. No or low lender fee loans typically have all of the other fees associated with the loan and the upfront savings is very minimal.
Contact If you have any questions regarding our products, you can contact us by calling or e-mailing us and we'll get back to you as soon as possible. Thanks!
Information listed above is to be used for educational purposes only and is not guaranteed
Home | Sitemap | Contact Us | Links | Services | News | About Us | Ohio | Florida | Refinance | Purchases | Blog | Fixed Rates | Down Payment | CreditPrivacy Policy
| 
