December 5th, 2007 5:03 PM by BILL WILBANKS
Understanding "Low or No Closing Cost" Ads
They're everywhere and they can be of service to you. Your current lender has probably made you similar offers. It sounds like a Special Deal. You get the loan rate you want and pay very low or even no closing costs to get it. Some ads even imply they're the only ones that can offer it or no one can do what they do! Sound familiar?
That's all hype and generally wrong! What you need to know is:
Anyone can do it if you select a higher rate! It's very simple.
It's a standard "rate buy-up". What's that? Well, average closing costs on a typical fixed rate conforming loan size with no points or origination, depending on loan size (smaller mortgage amounts can skew it due to fixed costs of course), will run about 2% +/- of the loan size. The higher the rate you elect to take will pay more to the originator to do the loan. So, if you want to buy-up the rate by say .375% to 1.00% or more, then the lender will be able to pay a certain amount of closing costs for you out of the extra fee they receive from the lender. Customize it to fit your needs.
The Upside? You don't have to add the costs to the mortgage balance on a refinance or pay more at closing on a purchase. But, you are paying the costs through the higher rate. That may be the way to go if you're limited on closing funds, or don't want to increase your refinanced balance, or you're only keeping it short term and don't want to bring cash to closing. BUT in any event, any loan officer can offer it!
Any Downside? A higher rate for as long as you stay in the loan. Again, if you only intend to keep it for a short period of time that may be in your favor. If you intend to stay in the home/mortgage for 5 or more years, you need to look at the numbers because you'll have the higher payment due to the higher rate for the life of the loan. You may be better off with the lower rate and roll the costs in the loan or pay them at closing. That's what is meant by recovery time, how long will it take to get those costs back through payment savings from the lower rate compared to the buy-up?
Bill Wilbanks / www.OrlandoMortgageMasters.com