Aren't there a lot of ads these days promoting "a great loan program that no one else has, so call immediately"? One of the most consistently promoted programs these days is the No Cost Home Loan.
It’s everywhere – radio, TV, the web, even in the shopping malls these days. “Refinance now with us and have no closing costs”. And you might think, “gee, with money being tight right now, that sounds good to me.” A free loan, save lots of money!
Didn’t Mom once say, “nothing in life is free”? And isn’t Mom usually right! Now, you actually can get a loan with little or no closing costs. But, what you’re not told is that you actually end up paying a higher interest rate than you really qualify for! This in turn means that you might save $3,000-4,000 in closing costs upfront, but the monthly payment could be $100-300 higher than it would have been if you had paid the closing costs.
Let’s walk through the process with the following example. Loan amount is $200,000. You will pay the closing costs on this loan, you qualify for a 6% rate. (not so perfect credit) Monthly payment (P&I) is $1,199. Banker ABC says “no closing costs, and 7%.” He may tell you, “the rate may seem just a little bit high, but you’ll save $3,000.” You think that sounds great!
What is not explained is the difference in the 6% rate you qualify for, and the 7% rate you choose to take for the “free” loan. Borrowing $200,000 at 7%, the payment is $1,330. So, that’s $131.00 more a month than the loan at 6%.
Now, if you choose the loan where you pay the closing costs and save $131 monthly, it will take you about 22 months to get your $3,000 back for the closing costs. And, if you stay in the house another five years beyond the “payback” time (22 months), you’ll save about $7,900 at the 6% rate. BUT, if you decide on the “no cost loan”, you’ll see about
$8,000 blow out the patio door into the wind.
Always ask what the difference in the rates is, and exactly what the closing costs will be. Figure the difference between the two programs – the loan with closing costs and the one without. Rule of thumb says that if in two years or less you’ll have paid back the closing costs, and you’ll be in the house for at least 5 years, then take the loan with the lower rate and pay the closing costs.
It’s our mission at InSight Mortgage Group to find the best loan program to meet your needs and to counsel you throughout the entire process. We specialize in making you, our client, our first priority. Please call us at 913-642-3334 or email me at firstname.lastname@example.org with questions regarding refinance or purchase loans.