April 18th, 2017 6:53 AM by Jackie A. Graves, President
a no closing cost mortgage isn’t necessarily a bad thing – as long as you
understand how you’ll be paying those costs. To start with, a no closing cost
mortgage doesn’t mean you won’t pay the costs associated with taking out the
loan. When you take out a mortgage, there are costs that need to be paid. These
vary but typically include: origination fees, credit checks, appraisals, title
searches, mortgage broker commissions, escrow services, referral fees, and
closing, you’ll be expected to pay out of pocket for the down payment plus
these fees. Your actual costs will vary but these can total between 2% up to 5%
of the loan amount. On a $200,000 mortgage, the total can be between $4,000 (at
2%) and $10,000 (at 5%). That’s a substantial amount when you’ve already been
putting away the dollars for a few years to save the down payment. It can
literally make or break your ability to close the deal.
There’s No Free Lunch
you elect to go with a no closing cost mortgage, the costs are recovered by
charging you a higher interest rate. It’s not unlike paying points to buy down
the interest rate – only in reverse, you pay a higher rate to save closing
course, a higher interest rate means a higher monthly payment. That higher
monthly payment is your key to figuring out if paying closing costs or paying a
higher interest rate is the better deal for you as a consumer.
When a No Closing Cost Mortgage Works for You
tool for you to use to figure out your better option is a good mortgage
calculator (there are many versions available online). A good calculator shows
you the accumulative interest paid over time. You need to compare two
calculations. You need to first know the total closing costs that you won’t
have to pay (for example $4,000 at 2%). Find the point on the higher interest rate
amortization schedule when you’ll have paid the $4,000 in higher interest
compared to the lower interest amortization schedule. Start at around year 5.
This is the point in time when the no closing cost loan begins costing you more
in interest than the lower rate.
consider if you believe you’ll still own the home at that point in time. If you
sell before the no closing cost loan reaches this point, you’ll be saving
money. If you still plan to own the home, you’ll be paying more money in the
consideration is if you think interest rates will go lower in the future and
you might refinance your mortgage before this point in time. However, more
variables come into a refinance consideration. When refinancing, you no longer
need to be concerned with making a down payment plus you’ll have built more
equity. That means you’ll be refinancing a smaller amount, which equates to
less in closing costs for the refinance. Likely, you’ll be able to wrap the
refinance closing costs into the new loan at a lower interest rate. Refinancing
before the no closing cost mortgage begins costing you more money is often your
be considered are the “time value of money” and “opportunity costs”. The time
value of money is about what a dollar in your pocket today would be worth at a
future date (inflation). Opportunity cost is about other opportunities you
forego by spending your cash to pay closing costs today. Not paying closing
costs but paying a higher interest rate might make the difference whether you
can even buy the house today. Another opportunity might be using that money to
make improvements on the home you buy today.
When Paying Closing Costs is Your Better Choice
be painful paying those closing costs up front but it could be the frugal thing
to do in the long run. If you plan to stay in the house past the breakeven
point, it will cost you less over the length of the loan. You’ll also have a
smaller monthly payment that could make it easier to deal with other financial
surprises that are certain to come up in the future.
paying the closing costs up front when interest rates are low right now and you
expect them to go up in the future. Also when you plan to keep the loan for
many years and you can afford to buy the cheapest rate available. There are
also income tax implications. Some closing costs are tax write-offs. If you pay
them today, you’ll be able to write them off against current income. If you go
with the higher interest rate, you’ll be able to write them off over time as
interest paid for your primary residence.
calculations aren’t simple. They require making assumptions about what will
happen in the future. However, scrutinizing the numbers enables you to make an
educated guess as to what is best for your financial future.
By Brian Kline - To view
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