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No
Closing Cost Loans
One Fee, Flat Fee, and No Closing Cost Loans are becoming increasing
popular. They represent an intriguing idea and depending on your
circumstances may be a great option for you to consider for your
loan.
Here’s how
they work:
If the market rate of a 30 year fixed rate mortgage is 6.50%, and
the lender delivers to the investor a loan with a higher than market
rate; the lender earns a premium on that loan. That premium can be
used to pay all or a portion of your closing costs and prepaid
expenses. Here is an example of how that may work:
Let’s say you’re getting a mortgage of $150,000.
At the rate of 6.50% on a 30 year fixed rate loan, the principal and
interest rate would be $993 a month.
Normal closing costs on a loan that size will vary somewhat from
market to market, but a reasonable average would be around $3,200.
On a No Closing Cost loan, the interest rate would be 7.00%. At that
rate the principal and interest payment would be $1,039, but the
closing costs would be zero.
So the trade off is $46 more a month in monthly payment versus
$3,200 in additional up front fees.
If you do the math, you would have to live in the house over 70
months; almost six years, to be better off as far as total cost is
concerned.
The option looks even better if you consider that because the
payment difference is all mortgage interest, it's tax deductible. So
the difference on an after tax basis will be even less, maybe a lot
less depending on your individual tax bracket. Considering after tax
dollars, the time to recover the upfront investment is even longer;
therefore, you could take that money and invest it and the option
becomes even more compelling.
The higher the loan
amount, the narrower the spread will be between a No Cost Loan and Loan where
you pay the closing costs. For example, for a loan of about $300,000 expect the
difference in rates to be about 0.25% (6.00% if you pay the closing costs or
6.25% if the bank pays the fees).
Title and escrow companies have recently started
offering Reasonable Closing Costs on refinances. First American Title, Fidelity
and Chicago offer what are being referred to a one rate plans. A single fee that
covers a majority of the fees charged for escrow and title during a refinance.
These programs help reduce the fees as well as simply the closing statement.
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