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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.


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