Best Interest Rate or Low Closing Costs?
First and foremost, there is no such thing as a zero cost loan! No one works for free!
Everyone knows there are costs associated with getting a mortgage loan; appraisal, credit reports, state taxes, county recording fees, title companies fees, lender fees, escrows, and more. Someone has to pay these fees, and it is always YOU. How you pay them is you need to understand.
In a no lender fee or no closing cost mortgage loan, the lender simply uses “negative” points to offset your costs. For example by selecting maybe a 4.75% interest rate versus a 4% interest rate, you can reduce (or offset through interest rate) most, if not all of your closing costs.
By choosing this option, it appear as if you saved thousands in closing costs. GREAT! But while lower costs always sounds good, you now have a significantly higher interest rate! OK, now what?
No matter what anyone says, a no closing cost, or no lender fee loan is NOT automatically a great deal!
Although it may sound so much better than paying thousands in closing fees, you have to analyze each individual loan and client situation to determine the benefits. Many lenders speak highly of the “thousands of dollars” you save in fees. They never discuss the fact that you may spend significantly more in interest over the full life of the loan than you ever saved in up-front closing costs!
There is a break even point… Generally speaking, if you are in the home under 5-years, a low or no closing cost can be a good deal. On the other hand, being in the loan more than 7-years generally means the no closing cost loan actually costs you a lot of excess interest. Talk to a local licensed mortgage professional (not a bank application clerk) and have them run the numbers on both options to see what makes most sense for you!