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.
Filed Under: Borrower Tips