If you hear the term "Absolutely No Closing Cost," you would assume that there are no closing costs (lender, escrow and title) involved in the loan. But actually this is really just a creative way of marketing or selling this type of loan. Is there really a absolutely no closing cost loan?
No, there is none, because when you buy or refinance your loan mortgage brokers and lenders have to make a living. And if they dont charge you anything, that is not because they are doing it for “free.” They need to get compensated and they charge it to you one way or the other. Typically, they will charge you a slightly higher rate, maybe .250-.500% higher than the best prevailing rate. The higher rate will cover for all the closing cost that the Mortgage brokers needs to pay for.
This doesnt mean, though, that this kind of program is not beneficial for you. Actually, I always recommend this loan especially for those who have just paid closing cost to purchase their home or refinance their home. This is to avoid paying closing cost over and over again, wasting all that cash on closing costs that could have added to your equity.
Plus, if you do not pay any closing costs, then you can keep refinancing and refinancing without decreasing the equity of your home. Of course, not every borrower is eligible for this no-closing-cost program. Normally, to be able to lower your rate by .500% without having to pay any cost, potential candidates have to have a loan amount of over $200k.
You always have to consider how many times you have refinanced in the past and figure out how much you have paid already. In the past two years, we have numerous clients that have refinanced their loans even only reducing it by less than .50%. Why did they do it? Because there is absolutely no cost involved and if your loan balance is over $400K that could be almost $100 difference in the payment every month, without any cost.
I always recommend that if you are to refinance your loan, do it sooner and try to get a more stable loan to avoid having to start your loan over again. Why right away? If you think you will have to refinance, that means that the payments you made to your existing loan are all gone and you will have to start over again. For example, if you have a 2 year fixed rate loan, you know that this is a temporary loan, why not do it right away to avoid paying any more payments to your current lender? If you had paid 12 payments and have to refinance to a new loan, that means you had paid a total of 31 years after all is said and done. I am sure a lot of you are starting loans over and over again for many reasons, but these rates have stayed low for you to take advantage of, so grab it while you can.
If you have a lot of equity and feel that you will live in your property for the rest of your life, and you are also being offered a really low interest rate, then you may consider paying closing cost to get this loan. But if it's short-term, then we will need to calculate to see how long it will take you to break even from the closing cost that you paid upfront. Sometimes it will take you 5-10 years to break even and most of the time, by then you are already ready to move on to your next home.
In every loan program, the key is to understand what you are being offered and getting into. Let me explain a little more regarding the two different types of closing cost.
One is “Re-occurring Closing Costs.” These are your interest, taxes and insurance costs of the loan. When you are buying a house, the lender will always require you to buy a year of hazard insurance, to be paid with your closing. When you are refinancing, you will also be required to prepay a year at closing, if there is an overlapping of premium due dates, your insurance carrier will usually credit the balance back to you. Interest payments are also collected for both purchase and refinance loans, we always pay our interest in the rear of the month of our mortgage payments. When someone offers you a free month of mortgage payment or for you to skip a month of mortgage payments, they are not explaining the loan to you properly. Again their are no free rides.
Another common “Re-occurring Closing Cost” is your taxes. Again, for purchase and refinance, you will always have to prepay property taxes that are due.
The second form of closing cost is the “Non-reoccurring Closing Cost” (NRCC). These are your points, lenders costs, escrow and title charges. When you are purchasing a house, your NRCC are typically tax deductable in the first year of purchase. While a refinance transaction will allow you to write off the closing costs over the term of your loan. That means if you had paid $5,000.00 in closing costs on a refinance, you will write off on about $166 per month on a 30 year loan.
I read an article in the LA Times a few weeks ago with startling statistics that people now are thinking of not paying their loan off, and would rather borrow as much as they can and as long as they can. To me, that is a trap just like your credit cards, how many people have fallen victims to that credit card money pit. Keep in mind, we are all enjoying high home values and equity, which I suppose should be called “High fly on borrowed Sky.” Once the correction on property values occur (and they will if what the think tanks are predicting comes true), you're going to need some cushioning for emergencies. Lines of credit again are to be use for short term only and not for buying cars, boats or doing major improvements to your home. They are adjustable rates that have only one direction, and that is to the roof. Please also try an fully understand your 1% loans. I just spent at least two hours explaining to a client who wanted to apply for these 1% loans. In her case, it was beneficial for her and I am putting her in with a good index adjustable loan that is tied to “COFI.”
Ken Go has been running his southern California home loans business since 1987. His honesty and courtesy equal loyalty to his customers. Forget about "good faith estimates." With 1st Innovative Finance Group, all loan rates and fees are guaranteed upon application. Ken Go writes a California home loans blog for anyone who might want free advice about financing a home with a mortgage. Ken speaks English, Chinese, and Filipino (Tagalog).
