Sounds attractive, doesn’t it? Getting a home loan and not having to pay those pesky closing costs? When you first embark on getting a home loan and talk to your loan officer, it’s information gathering time. You want to know how much you can qualify for, what your monthly payments will be and how much down payment you’ll need. You can be you’ll also ask about closing costs. Your loan officer can prepare a Loan Estimate for you.
This loan estimate is a three-page form that provides important information about a potential mortgage such as a note rate, the annual percentage rate, how much interest you would pay over the life of the loan and other data points. The loan estimate will also itemize potential closing costs associated with getting a mortgage. But where’s the No Closing Cost mortgage?
The truth is there really is no such thing. There are costs associated with all mortgages, it’s just a matter of how and who pays for them. Sellers can pay for some or all of your closing costs on most loans and lenders can also help out with a lender credit. It’s with this credit that the phrase “no closing cost” comes into play.
Here’s how it works. You know that with each loan program lenders provide multiple rates from which to choose. If you want a lower rate you’ll be asked to pay discount points. A discount point, or simply a “point” is expressed as a percentage of the loan amount and lowers, or discounts, the note rate on your mortgage. As an example, consider a 30 year fixed rate quote of 4.25 percent with no points at all. But you might want to pay one point on a $200,000 loan to lower your rate to 3.75 percent. One point equals $2,000 and is in essence a form of prepaid interest to the lender.
Conversely, you might be able to choose a 4.50 percent rate and suddenly there’s a lender credit available to you for $2,000. This credit will be applied toward your closing costs when you attend your closing. This credit has multiple variables but primarily the main consideration is the adjustment in rate and the amount of your closing costs. On a $50,000 mortgage for instance, one point is just $500 which won’t make much of a dent. But a $300,000 mortgage and a $3,000 credit can. So much so that the lender credit pays for all of your closing costs.
Note here there are two types of costs, recurring and non-recurring. Non-recurring costs are those you’ll see at your closing and never again. Costs such as lender fees or escrow charges. Recurring costs are those you’ll pay for over and over throughout the life of the loan and include interest, taxes and insurance. No-closing cost loans typically refer to non-recurring costs, not recurring ones.
Most any mortgage loan can be constructed to provide some sort of lender credit and all lenders can offer one. A no-closing cost mortgage can sound attractive but in reality there is a closing cost to you- higher monthly payments.
Written by: David Reed