HOW MUCH DOES A NO COST MORTGAGE REALLY COST?

What Is A No Cost Mortgage Loan?

Quite often of late I see advertisements for no cost mortgage loans, particularly with regards to a refinance.  Like mother always told you, if it sounds too good to be true, it might just be.

A no cost loan can either be a great deal for a borrower or a not so great deal.  And just as there must be 100 different types of first mortgages out there, there are probably as many different scenarios for no cost or reduced cost or low cost loans.

How do you decide what’s best for you?  Short of spending every waking hour worrying about what’s best I recommend finding a lender that will sit down with you and explain several different options.

What Are My No Cost Mortgage Options?

First decide if you want a fixed or adjustable, and how long you wish the loan to amortized over.  Most mortgages are for 15 or 30 years, but don’t hesitate to ask for a 10, 20 or 25 year if you think it might work for you. Once you decide on these items your lender can quote you several scenarios involving rates and closing costs.

The rule here is that the lower the closing costs, the higher the rate, but that is not always a bad thing.

Let me give you an example of a loan I am currently working on for a local couple who are refinancing their condo in Eagle-Vail.  They bought the property about a year ago, and obtained a 30-year fixed rate mortgage at 3.75%, which was a good rate at that time.  The loan amount they need is $450,000.00.  their current P&I payment is $2,020.00.

They want a new 30 year fixed rate to lower their payments, but they don’t have a lot of cash to bring to closing and they’re not sure if they will stay in the property more than a few more years, but in case they do they want a fixed rate rather than an adjustable.

I offered them three options.  The first would be a 30 year fixed rate of 2.625%; this would lower their payment from $2020.00, or $1807.00.  However to get that rate would cost them a 1% origination fee and about $3200 in closing costs.  This 7,600 total would take them about 36 months to recoup by saving $213/mo.  After that they would be doing great, but they were hesitant to invest that much in closing costs if they might sell the property in a few years.

Because they had equity in their property we could have added the $7.600 onto the loan amount and they would not have had to bring the cash to close, but they were uncomfortable with this as their goal was to build equity in their home, not borrow more money against it.

The second option we looked at was a fixed 30 year rate of 2.875% with a monthly payment of $1860.00 and no 1% origination fee but with closing costs of about $3,100.00.   This would only take about 19 months to recoup by saving $160/mo on their payments.  By going with the slightly higher rate they eliminated $4,500 in closing costs, but raised their payment slightly over the loan that required higher closing costs.

The third option was a “no closing costs” loan at a rate of 3.125%.  This gave them a monthly payment of $1,927.00, which was $93/mo lower. By agreeing to the higher rate though there would be no origination fee and I would pay all their closing costs except for an appraisal and credit report.  We did not add it onto the loan amount, the closing costs of the title work, underwriting, filing and other fees were paid by the lender via a closing cost credit at the time of settlement.. This allowed them to recoup their investment almost immediately and get a lower rate.

We finally agreed on the second option, which they felt would be in their best interests, but any of the three would have been fine with me.

No Closing Cost On A No Cost Mortgage Loan?

Borrowers should beware of the lender who advertises  “no out of pocket closing costs”.  This sounds great, because after all if it’s not out of your pocket what do you care.  What these ads often refer to is that the lender will add the loan costs onto the principle  balance of the loan and you now owe the money as by means of a larger mortgage than you intended to have,(so it really does come out of your pocket eventually!

This can be okay if the costs are reasonable and the borrower wants it that way and he is aware of it.  I have heard of situations where a borrower was only informed of this at the closing table, and I personally don’t find that an ethical way to treat borrowers, and try to clearly explain their options to them.

Chris Neuswanger can be reached at Eagle One Financial  in Avon at 970-748-0342, via e-mail at mtnmortgageguy@gmail.com, or click here to contact Chris now and he welcomes mortgage-related questions