When considering buying a home, you have to factor in the closing costs. Most homebuyers spend somewhere between 2% and 5%of the purchase price on closing costs. If you’re willing to finance your closing costs, the cost upfront is less. In order to make the best decision possible, it’s important to consider the advantages and disadvantages.
No Closing Cost Mortgage – How it works
The closing costs consist of fees that borrowers have to pay, that ranges from title insurance to appraisals. Another thing to note is that these fees can be very high. The Federal Reserve Board said that closing costs have the capability to be 3% of a home’s sales price on purchase loans. If you decide to buy a home that costs $250,000, your closing costs will come out to be around $7,500.
Come to think of it, that’s a lot of money to get together. This is the reason why most people seek no-cost mortgage loans. This type of loan gives individuals the opportunity to pay their closing costs in an economical way.
Take this for example. A lender offers you a 20-year fixed-rate loan of $200,000. The interest rate is 4.5 percent but closing costs amount to $6,500. That same lender might consider lowering the closing costs if you are willing to agree to a 5% interest rate on the loan.
The Downside of a No-Closing-Cost Mortgage
In some cases, there may not be lending fees. The downside is that you have to pay for title insurance, a title search, appraisal, credit check, and other charges. I’d recommend asking the lender for a good estimate of all the fees they may charge you. Even though the estimate can change before closing, at least you’ll know what you’ll have to pay.
Another thing to note is that lenders charge a high-interest rate to compensate for the low fees. Here are the key points you need to look for and negotiate: interest rate, fees, and points. The major advantage of paying low fees is that is if you plan to keep the loan for only a short time. Having a low-interest rate is good if you plan to keep your house for a while.
If you’re low on cash, there are lenders out there that will let you add your closing costs your current loan balance.
No Closing Cost Mortgage – When It Makes Sense
Furthermore, you’ll have to use more than simple math in determining break-even points while keeping the most important rule: buy only the house you can afford under your budget.
Individuals who aren’t able to spend tons of money on closing costs can benefit from this type of loan. In fact, it may be the only way for people to even get home.
Those who desire to stay in their home during the loan term or those who stay past the break-even point may still choose a no-cost loan (that has a high-interest rate), which is contingent on their financial situation.
Let’s say that borrowers have to pay $6,000 in closing costs for a $250,000 mortgage that has a 30-year fixed-rate term. The lender may decide to offer a no-cost loan for an interest rate that’s a quarter of a percent higher. The higher rate can add approximately $40 a month to their mortgage payments.
People who stay in their homes for the whole 30-year period, they’d have to pay around $14,400. That amount is spread out over 30 years in comparison to what they could’ve paid, which is an amount of $8,400 in closing costs for the lower interest rate. My point is this. These borrowers would have been better off paying the $8,400 in closing costs upfront.
Moreover, these loans aren’t the only factor. What if the borrowers have a strict cash budget during the home-buying process? The $8,400 that was unnecessary to spend could’ve helped them get more furniture for their home. This is more welcoming than the $6,000 or so they had to stretch out over three decades.
Furthermore, there are other reasons why a no-cost loan might not be the right choice. Let’s say that a married couple is 10 years away from retiring. Their desire is to refinance their existing loan to a 10-year fixed-rate loan. In addition, their goal is to have their mortgage paid off before they leave the workforce. Instead of paying a very high-interest rate, they decide to pay their own closing costs. As a result, they can take advantage of the lower monthly payments that come with a low-interest rate.
The extra $5,000 they have in their pockets empowers them to meet their goal of being debt free 10 years from now. It all boils down to this: the individual customer and what they have a vision for in life.
Is this Mortgage Option Right For You?
Getting a mortgage is one of the biggest financial decisions people make. This is why it’s important to determine if this is for you or not.
Make sure that you compare several offers. If the lender offers you a good interest rate with high fees, try to negotiate.
The lender may grant you a deal if you have a good credit score, along with a big loan amount. Also, Also, it’s important to contact your current mortgage company and ask them the right questions. They may be able to match the competition. The lender may also be lenient on some of the closing costs. Especially if they can use your old appraisal (if it’s not older than 6 months) and offer you a re-issue rate on your title insurance that can save you hundreds of dollars.