Tough economic times deeply affect all market areas, one of which is real estate. Luckily, I, the “Mortgage Doctor,” am here to work with you while you regain control of your finances, especially when it comes to your home.
Most people may feel lost when it comes to finding functional and affordable solutions to their home ownership, but I am here to offer direction and guidance in an effort to get you the best deal when it comes to closing costs.
With interest rates at historic lows, many homeowners are considering refinancing. One question that seems to come up often is, should I pay closing costs or not? Here is a list of options to consider when looking at refinancing. Each option has its benefits, so there's no one size fits all answer.
1. No Closing Cost Refinance
Like the title says, it means you the borrower do not pay closing costs. The next question is who is paying them? Indirectly you are. By taking an interest rate slightly higher than the market rate, the broker can use the "Premium" in the interest rate to pay all your costs. For the purposes of this example, let's take a look at how this “no cost refinance” works.
For this example only, let’s use 4.875% as lowest rate 30 Year Fixed Rate Loan available today and 5.125% as lowest 30 Year Fixed Rate Loan offered with no closing costs and a loan amount of $400,000. The lower rate will include $2,400 in closing costs. The higher rate will allow me the broker, to pay all your closing costs of approximately $2,400 in addition to leaving enough gross revenue to cover office expenses and overhead.
2. Low Closing Cost
This is a combination of the “No Closing Cost” & “Full Closing Cost” options. By taking an interest rate slightly higher than the market rate, the lender or broker can use the "Premium" in the interest rate to pay a “portion” of your closing costs.
3. Full Closing Costs
Now look at the monthly payments:
$400,000 Loan Amount * payments exclude taxes and insurance
Most people may feel lost when it comes to finding functional and affordable solutions to their home ownership, but I am here to offer direction and guidance in an effort to get you the best deal when it comes to closing costs.
With interest rates at historic lows, many homeowners are considering refinancing. One question that seems to come up often is, should I pay closing costs or not? Here is a list of options to consider when looking at refinancing. Each option has its benefits, so there's no one size fits all answer.
1. No Closing Cost Refinance
Like the title says, it means you the borrower do not pay closing costs. The next question is who is paying them? Indirectly you are. By taking an interest rate slightly higher than the market rate, the broker can use the "Premium" in the interest rate to pay all your costs. For the purposes of this example, let's take a look at how this “no cost refinance” works.
For this example only, let’s use 4.875% as lowest rate 30 Year Fixed Rate Loan available today and 5.125% as lowest 30 Year Fixed Rate Loan offered with no closing costs and a loan amount of $400,000. The lower rate will include $2,400 in closing costs. The higher rate will allow me the broker, to pay all your closing costs of approximately $2,400 in addition to leaving enough gross revenue to cover office expenses and overhead.
2. Low Closing Cost
This is a combination of the “No Closing Cost” & “Full Closing Cost” options. By taking an interest rate slightly higher than the market rate, the lender or broker can use the "Premium" in the interest rate to pay a “portion” of your closing costs.
For this example only, lets use 4.875% as lowest 30 Year Fixed Rate Loan available today and 5.0% 30 Year Fixed Rate offered with low closing costs of $1,000 and a loan amount of $400,000. The lower rate will include $2,400 in closing costs. The higher rate will allow me the lender, to pay a “portion” of your closing costs of approximately $1,400 in addition to leaving enough gross revenue to cover office expenses and overhead.
3. Full Closing Costs
Like the title says, it means you the borrower pay closing costs of approximately $2,400. For this example only, let’s use 4.875% as lowest 30 Year Fixed Rate loan available today and you the borrower will pay the $2,400 in closing costs.
Now look at the monthly payments:
$400,000 Loan Amount * payments exclude taxes and insurance
30 year fixed rate loan program (same criteria works for 15 & 20 year fixed rate programs)
4.875% = $2,117 monthly P&I
5.0% = $2,147 monthly P&I
5.125% = $2,178 monthly P&I
Compare: 4.875% v 5.125% (No Closing Costs)
4.875% = $2,117 monthly P&I
5.0% = $2,147 monthly P&I
5.125% = $2,178 monthly P&I
Compare: 4.875% v 5.125% (No Closing Costs)
monthly savings: - $2,117 – 2,178 = $61 lower payment by selecting the 4.875% rate.
Now look at the total costs divided by the savings: $2,400/$61 = 39.3 months or 3.28 years to break even. That means after 3.28 years, the lower rate and paying the closing cost would have paid off.
Compare 4.875% v 5.0% (Low Closing Costs)
Now look at the total costs divided by the savings: $2,400/$61 = 39.3 months or 3.28 years to break even. That means after 3.28 years, the lower rate and paying the closing cost would have paid off.
Compare 4.875% v 5.0% (Low Closing Costs)
Monthly savings: $2,117 – $2,147 = $30 lower payment by selecting the 4.875% rate.
Another factor to take into consideration is the loan to value ratio of the new loan to your home's value. If for example, adding closing costs to your loan puts you into a higher loan to value bracket, you may opt to go with the lower closing cost or no cost option. Or if you have to pay private mortgage insurance by adding in closings cost, you may opt to go with the low or no closing cost option.
After all is said and done, you don’t want to walk away from a closing and regret your decision, or fear that it will negatively impact your pocketbook in the long run. Therefore, precautions and future planning must be executed to ensure you receive the best deal possible.
Not everyone grasps the “closing costs” concept very well, and there are lots of other elements of your home financing that can add up quickly, but I am here to help. If you have any questions about your home or are looking to purchase in the near future, contact me at 402.301.4500 or email me anytime at terry@terrywilliams.com.
Now look at the total costs divided by the savings: $1,400/$30 = 46.7 months or or 3.88 years to break even. That means after 3.88 years, the lower rate and paying a “portion” of the closing cost would have paid off.
Another factor to take into consideration is the loan to value ratio of the new loan to your home's value. If for example, adding closing costs to your loan puts you into a higher loan to value bracket, you may opt to go with the lower closing cost or no cost option. Or if you have to pay private mortgage insurance by adding in closings cost, you may opt to go with the low or no closing cost option.
After all is said and done, you don’t want to walk away from a closing and regret your decision, or fear that it will negatively impact your pocketbook in the long run. Therefore, precautions and future planning must be executed to ensure you receive the best deal possible.
Not everyone grasps the “closing costs” concept very well, and there are lots of other elements of your home financing that can add up quickly, but I am here to help. If you have any questions about your home or are looking to purchase in the near future, contact me at 402.301.4500 or email me anytime at terry@terrywilliams.com.
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