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Home Mortgages: Does a No-closing-cost Loan Make Sense for
You?
I have heard a number of radio ads and have seen many
newspaper ads offering "no closing cost" home mortgages. These
ads will tell you that you can get a new mortgage or refinance
your existing mortgage at absolutely with absolutely no closing
costs.. There are no points, no charges for an appraisal, no
charge for title insurance, no costs, period.
On the face of it, this sounds like a great deal and no-cost
mortgages are especially popular with people who are refinancing
an existing mortgage.
How does this work? Normally, a 30-year, fixed-rate mortgage,
would have closing costs in the neighborhood of $2,000 to $3,000
or even more, depending on whether or not you pay points upfront.
In fact, we talked to one mortgage broker two weeks ago about a
mortgage on an investment property we own in another state and
the closing costs were quoted as $7,000 - outrageous but at least
not typical.
You've probably heard the old adage, "there is no such thing
as a free lunch," and these no-cost mortgages are yet another
testimonial to the truth of this.
The way that no closing cost mortgages work is the lender
gives the mortgage broker a rebate at closing which the broker
then uses to to pay the settlement costs. The way the lender gets
its money back is by charging a higher interest rate. For
example, for a $230,000, 30-year fixed rate mortgage with no
upfront fees, your interest rate would most likely be a least
0.35% higher that if you paid one point and the customary closing
costs.
Here's an example of what this means. As of this writing,
there were mortgages available at 5.250 %, plus one point. As you
probably know, one point equals one percent of the mortgage so
one point on a $150,000 mortgage would be $1,500.
The monthly payment fo this loan, excluding taxes and
insurance is $826.00. The closing costs would be $1,500 plus the
normal settlement costs of, say, $1,500,A for a total of
$3,000.
Let's compare this with a no-cost mortgage. Assuming the
interest rate is 0.35% higher as quoted earlier, the interest
rate on a 30-year, fixed-rate mortgage would be 5.725%, yielding
a monthly payment of $872.98 or about $46.00 per month vs. the
loan where you would pay one point and the normal settlement
costs.
Given a savings of $46.00 per month, it would take you about
65 months - or 5.5 years to make up for the $3,000 you paid in
closing costs. This means that you need to determine how long you
will stay in that house before deciding on a mortgage loan or a
refi. If you intend to stay in that home and not refinance your
mortgage for more than six years, it might make sense for you to
pay the point and the normal settlement costs. On the other hand,
if you believe you will sell that house or refinance it in less
than five years, a no-cost mortgage might be better.
Just make sure you look at all the various alternatives and
their long-term costs before you leap into a new mortgage.
For FREE help with debt and credit, subscribe today to Douglas
Hanna's free email newsletter "8 Simple Steps to Debt Relief" at
http://www.all-in-one-info.com
 MORE RESOURCES updated Thu. September / 09 / 2010
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