No Closing Cost Refinances and Purchases
Any loan where the broker or lender pays all of your closing costs is commonly referred to as a "no closing cost"
loan. These closing costs would include title & escrow fees, appraisal, lender's fees, credit report fees, and other expenses which are non-recurring over the life of the loan. Lender's use the term non-recurring to refer to only those expenses which are one time, and to exclude items such as interest, insurance, and property taxes, which are considered recurring closing costs because they will continue to be expenses every month. Recurring costs are not covered expenses in a no closing cost loan.
In the mortgage market, there are a variety of interest rate and point combinations available to the borrower at any point in time for the same product or loan type. As an example, for a loan amount of $200,000 a borrower can be
quoted 6.75% with .875% points, 7.0% with zero points, or 7.25% with no closing costs. All three of these quotes are for a 30 year fixed rate mortgage. The lender allows the borrower to choose amongst rate and point combinations
since some people prefer a lower rate immediately, while others prefer minimizing how much they pay out of pocket up front. Thus, the borrower can select the combination which feels most comfortable to their personal situation. For
some borrowers, the no closing cost option of 7.25%, while providing a slightly higher rate, still requires the least investment up front and therefore is the best option. A true "no closing cost" loan differs from both
a "no lender fee" loan or a loan in which the lender adds the closing costs to the amount financed. A "no lender fee" loan, sometimes advertised by banks, usually will not cover the title, escrow, and
other outside charges you may need to complete the refinance or purchase. No cost loans will always carry a slightly higher rate than a loan that does not pay your costs. In general, a no cost loan is the better strategy if
you plan to keep your loan for the next one to three years. Longer than that, you should consider paying the costs yourself to get a lower rate since over time the lower interest rate will save you more money. And if you plan
to keep the loan for four to five years, it often makes sense to pay closing costs and points to get an even lower interest rate. (Points are up-front mortgage interest fees paid on a loan to reduce the initial interest rate.)
Very recently, the emergence of multi-lender mortgage sources on the Internet with lower overall cost structures have made no closing cost loans at lower rates easier to obtain. As greater efficiencies are achieved and fees
and costs are reduced further, consumers should see no closing cost loans become available at even lower rates on the Internet. No Cost Refinances
With a true no closing cost loan, you can refinance
for any incremental drop in your interest rate. Because there is absolutely no investment in up front costs, the savings of refinancing are immediate. In a market where you believe rates may continue to fall, it makes sense to
refinance at no cost. Should interest rates decline further, you can refinance again without having to recoup the closing costs. Many borrowers refinance every year or less at no cost, while keeping their initial teaser rate in an
Adjustable Rate Mortgage! Tax Issues - Refinance No Cost Purchases In some cases no closing cost loans can give a borrower more cash than is needed for the direct closing costs. As long as this does not exceed the lender's guidelines
(typically 3% of the purchase price in overall credits), this cash can be applied to other costs in the transaction. Tax Issues - Purchases A no closing cost loan will not have points, and thus no deduction for
that cost. Additionally, the other costs are paid for and no deduction is available. If you are purchasing a home, points and some costs are generally entirely deductible in the year you buy. This is true even if the seller is
paying for your points. In summary, no closing cost loans can be used successfully in either a refinance or a purchase loan. These loans will minimize the up front closing costs that you pay, and are generally best used
in a stable or declining interest rate environment. By carefully using this type of strategy, a borrower can continue to replace his home loan without incurring costs or increasing the outstanding principal balance of the mortgage.
Web based mortgage services have driven down the costs associated with obtaining a loan, and thus lower interest rates are now available at no closing costs to the borrower. Shoreline Mortgage Corporation | | Home | C o p y r i g h t © 1 9 9 8 , 1 9 9 9 Shoreline Mortgage Corporation
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