No Closing Cost Loans
No Closing Cost Loans can be done as a purchase or refinance. A loan with no closing costs is achieved when the lender pays a premium in exchange for a higher interest rate. The premium is used to pay for the closing costs. The following is a comparison of a refinance with a loan balance/payoff of $350,000.00.
| No Closing Cost | Closing Costs Financed in loan amount |
|---|---|
| Loan Amount - $350,000.00 | $356,197.00 |
| Interest Rate - 6.5% | 6.125% |
| Closing Costs - 0 | $6197.50 |
| Monthly Payment - $2212.24 | $2164.29 |
In this example, the borrower would save $47.95/month by adding the closing costs and taking the lower rate of 6.125% but the savings is at a cost of $6,197.50. If you divide the savings of $47.95 into the closing costs, you will see it takes 129 payments, or 10.7 years to recover the closing cost investment. Since interest rates fluctuate up and down over time, it makes more sense to do a No Closing Cost Loan and refinance in the future when rates fall below the current level, at no expense to the borrower. In other words, when the interest rate drops 3/8 of a point below the above example, the rate would move from 6.125% to 5.75%. At that time, the No Closing Cost rate would be 6.125% which enables the borrower to refinance again adding $0 to their loan balance and lowering their payment by $85.36/month.
If the borrower had rolled the closing costs into the loan amount earlier, costing over $6,000.00, they would have to spend an additional $6,000.00 to refinance again which would add another 10 years of recovery time. The No Closing Cost Loan is the most cost effective choice.
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Note: Interest Rates shown above are for comparison only. Actual rates may be lower, higher, or the same as rates shown.