No Closing Cost Mortgage Options
For some people a "no closing cost" mortgage sounds great. For some it sounds "too good to be true"! Which one is it? And if it's truly available, why would someone not want to get a no closing cost mortgage!?
No closing cost mortgages are a completely legitimate option, but they're not for everyone. Actually, we can start with the question above to separate fact from fiction...
Why Would Someone Not Want to Get a No Closing Cost Mortgage?
Lower rates are available if you pay closing costs. Every single mortgage involves various costs including third party fees. It's only a question of who pays them. A no closing cost loan means the lender is paying them for you. If the lender is paying them for you, they're obviously charging an interest rate sufficient justify this. Conversely, if you paid costs yourself, you could theoretically get a lower rate.
Which option is better? That's impossible to answer without details. So it's important to keep an open mind at this point in order to check out the details and compare.
Less beneficial to people who will keep the mortgage long term. The benefit of a no closing cost mortgage is the money you save upfront. On the other hand, the monthly payment is higher because you're not paying closing costs. This adds up over time. If you keep the loan long enough, the extra money you're paying monthly will eventually exceed the money you saved upfront.
How much time does it take? That's a key question! Every situation is different.
As a very rough, breakable, general rule of thumb, the break-even point for paying closing costs is often between 5 - 7 years. That means the upfront money saved on no closing cost options typically benefits you for that initial period of time. Beyond that period, the extra money you're paying monthly starts to outweigh the money you saved upfront.
Many people are not aware no closing cost options exist. Most people are not aware of no closing cost options. Maybe they've vaguely familiar with it, but they didn't realize it might be available for their particular loan. (In fact, they're not always available, especially small loans)
Preconceived biases prevent many people from considering. Often people have some preconceived bias. Someone might think, "If the rate's higher, I don't want it!" Why not? What's the logic? The rate is one bucket of cost. The closing costs are another. Until we know how they balance out, we lack the information to favor one verse the other.
In order to figure out what option will benefit you the most, you need the details in order to compare options. Sometimes people are too skeptical for their own good and just assume "no closing cost" mortgages are too good to be true.
In case it's not justified by Return on Investment (ROI) calculation. In order to figure out which option is likely to benefit you the most, we do an ROI calculation. Basically, we divide the upfront cost savings by the monthly payment difference. You'll see an example below.
Why Would Someone Want a No Closing Cost Mortgage
Because there are no closing costs! Obvious, right! "No closing costs" means upfront savings. The question is what is the long-term cost vs. benefit? For this we need to compare details.
Because monthly payment difference compared to full cost options may be smaller than you think. You may be surprised how small the payment difference is for a no closing cost option compared to full costs. Every situation is different. We need to consider the details of your personal situation to make an informed decision.
Because they're likely to sell or refinance within the next 7 years. The average lifespan for a 30-year mortgage is about seven years. Why is this? Because people sell and refinance. Plus, a few people rapidly pay off their loans. People tend to over-estimate how long they'll keep their loan. However, even if you didn't realize it, there's some chance rates could drop and you may refinance in the future. Or you pay sell sooner than you think. If any of this is likely to happen in the next seven years, we should consider the details of a no closing cost mortgage.
As you can see, it's important to keep an open mind at this stage. But until we explore your personal situation, it's all fairly abstract. We'd love to help you explore your options in a more meaningful way. If you're searching for a home within the next three months, start off by completing the information at Get Started Online.
Surprise! It's Not Just Two Options!
You shouldn't think of it just as full closing cost vs. no closing cost. The options exist on a scale. Often there is an option between full cost and no cost.
Here's an example to illustrate....
Example to Illustrate Thought Process about Closing Costs vs. No Closing Costs
Below is an example for illustrative purposes only. Although it represents the relative differences that have been available for certain people at certain times, the details vary. It's not an advertisement of particular rates offered at this time. But it will illustrate the process of figuring out Return on Investment.
Example A is the full closing cost option.
Example B involves a partial lender credit and is a low closing cost option.
Example C is a full closing cost option.
In the table above, notice the "Note Rate" and "Net Costs".
How can we think about this?
I immediately notice there's a big jump in "Net Costs" from Example A to Example B. There's a small jump in Example C.
What does that tell me? It tells me to narrow down the options between A & B. Forget C. Why? Because in this example, B is nearly a no cost option. You don't get much more benefit by going to C. Your payment goes up $19 per month on C just to save $410 upfront compared to B.
So far, you should see three points: (1) No closing cost options are legitimate options, (2) It's more complex than simply full cost vs. no cost, and (3) don't get caught up in the hype of "no cost" because sometimes the best option is in-between.
So let's compare A & B...
The upfront difference between the two options is $1220. In other words, you start off $1220 better off with B. Remember that. For that advantage, you pay $19/month more.
So how do we think about this with a Return on Investment (ROI calculation)?
Return on Investment (ROI) Calculation for Closing Costs
So here's the calculation. Simply divide the upfront difference by the monthly difference...
$1220 upfront difference / $19 monthly difference (=) 64 months
What does that tell us?
For the first 64 months, Option B is definitely better! For the first 64 months, the money you save upfront outweighs the money you pay monthly.
Question: Does that mean if you keep the home 70 months, Option A is definitely better?
Actually not! Why?
We have a saying, "a bird in the hand is worth two in the bush!"
The point is, it's valuable to have that $1,220 in-hand upfront. That could be $1,220 more you invest. It could be $1220 less you end up putting on credit cards or other debt. Money has time value. Over the next 64 months, the value of that $1,220 might grow to be much more than $1,220.
Plus, the fact is, we don't know if you'll keep the loan beyond 64 months. Who knows? Maybe rates will drop, and maybe you'll refinance. Maybe "life will happen", and you'll end up selling your home.
With all things considered, you'd really need to be confident about keeping the loan far beyond 64 months for Option A to be better.
This point illustrates how you shouldn't get overly-focused on the rate. You should see rates and costs on a scale, and keep an open mind to reviewing your options.
I hope that example makes sense. If not, don't worry about it! It will be easier to illustrate with real figures when we discuss your situation...
Let's Work Together!
As you can see, we approach the process very strategically. Our commitment is to help you explore your options and find what's best suited for you. We'll make it easy to compare, contrast, and see how the long-term differences will impact your financial situation.
On top of that, we can give you a distinct advantage with getting your offer accepted. When the seller's Realtor sees your financing is provided by us, it can make a big difference because of our reputation in the real estate community. Our VIP FasTrak program can give you a head start that sets you apart from other buyers. With this head start, you can offer more confidence, more reliability, and a faster closing to the seller.
Your first step is to complete the information at Get Started Online.
Considering the Bigger Picture
It's very common for people to "shoot themselves in the foot" by focusing on one or two aspects of the picture. This is obvious when people start off with a singular question like, "what's the rate?"
If you've read this article, you can see why these questions don't make sense. Everything exists on a scale.
A better question would be, "can you help me understand a few scenarios that best fit my situation?"
In reality, there are five key layers of inter-connected options --
1. What program (e.g., Conventional, FHA, VA, USDA, ect)
2. What downpayment (5%, 10%, 15%, 20%, 25% are most common)
3. What term (30, 20, 15, 10 year fixed or 5/1, 7/1, 10/1 ARM)
4. What option on the rate-cost scale (usually 3-4 viable options)
5. When and how long to lock (15 day, 30 day, 45 day, 60 day, ect.)
No cost and low cost options are generally available on most loan programs like Conventional, FHA, VA, USDA, and so on.
Choosing the right loan program in the first place can have much bigger implications than the topic we discussed here.
Once you select the program, layers 2-5 involve 204 options!
Getting the right combination of these answers will have the biggest long term impact on your financial picture. These answers could legitimately make the difference of $25,000, $35,000 or even $50,000 over the next ten years for the lives of many people.
The best way to compare options is get in touch with us. We do something called a Total Cost Analysis. Based on your situation, how long you plan to live in the home, your goals, and your financial picture, we'll walk you through this. We'll help you compare a few options that make the most sense. We'll provide a visual overview that will help to quickly see and understand the real cost/savings differences between each option...
How Can I Get More Information?
If you're beyond three months away from your home purchase, you can use the contact forms below. We'll get in touch to help you plan and prepare.
If you're hoping to buy a home within the next three months, what are you waiting for? The clock is already ticking, and you should get in touch immediately so we can strategically approach the process. Complete the form at our Get Started Online page.
I'm beyond three months away, but please help me get in touch to plan and prepare!
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