May 20, 2013 1 Comment

When obtaining a no closing cost loan, the obvious advantage is savings. Although, the savings will take longer to accumulate on a no closing cost loan than if closing costs are paid upfront. Regardless of time, however, borrowers should nonetheless carefully consider two vital variables when determining if a no closing cost loan is suitable for them. Two of the more essential variables when considering opting for a no closing cost loan are:

• Borrower’s financial situation
• How long the borrowers will remain in the home

Ultimately, a borrower’s financial situation is certainly the most crucial element in determining if a no closing cost loan is appropriate or not. If a borrower has the wherewithal to pay for the closing costs upfront, the lower the likelihood of the mortgage rate.

For example, a borrower who can afford to pay the closing costs upfront may be eligible for a current mortgage rate of 4.875%, while a borrower who has to roll the closing costs into the loan amount may qualify for a current mortgage rate of 5.125%. Using this example, let’s apply a scenario of a 30-year fixed-rate mortgage with a desired loan amount of \$250,000 with \$4,000 in closing costs. The borrower who can pay the \$4,000 closing costs upfront will have a monthly principal and interest mortgage payment of approximately \$1,323 with a mortgage rate of 4.875%. A borrower who decides to roll the closing costs into the loan amount will have a loan amount of \$254,000 with a rate of 5.125%. Their monthly principal and interest payment would be approximately \$1,383. As you can see, the monthly savings by paying the closing costs upfront, for this scenario, is \$60.

Another important variable to consider when considering a no closing cost mortgage is how long you plan on staying in the home. Utilizing the scenario outlined above, we’ll assume closing costs of \$4,000. If a borrower has a mortgage rate of 5.75% on an existing mortgage of \$250,000, they are making a monthly principal and interest payment of approximately \$1,459. Assuming the principal balance of the original mortgage loan was paid down to \$246,000, and the \$4,000 in new closing costs will be rolled into the new loan amount, this borrower is looking at a new mortgage loan of \$250,000. If the borrower qualifies for a rate of 5.125%, their new monthly principal and interest payment will be approximately \$1,361, a savings of \$98 per month. In this scenario, if the borrower plans on staying in the home for at least 44 months, they will recoup the entire \$4,000 in closing costs that were rolled into the new loan amount, and will then save approximately \$31,000 over the remaining term of the new 30-year fixed-rate mortgage loan. An online mortgage calculator can easily help assess this information for you.

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## 1 Comment

• Homeowner Loans says:

Good article. Getting a no closing cost loan makes a lot of sense in a rising real estate market. In a down market, it doesn’t make sense for someone who can’t pay closing costs up front to buy a home.