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The first question most people ask when they call for a mortgage is, “What’s your rate?” The commonly held notion is that the lowest possible rate means the lowest possible payment and the highest possible savings. This is not always the case. Closing costs like appraisal fees, filing fees and credit reports are additional costs you must also consider. Bear in mind that if taking advantage of refinancing options may be a future consideration, your closing costs become simply a wasted out of pocket expense.
The good news is, you can rid yourself of this closing cost burden. You don’t have to pay closing costs. You can pay a slightly higher rate and refinance for free. And in many cases, a free refinance with a slightly higher rate saves the most money.
On a $150,000 30-year-fixed mortgage, you might pay 4.75% with $1,500 in closing costs. Or you might ask to pay 5% and have your lender cover the closing costs. The 4.75% rate gets you a principal and interest payment of $782.47 verses $805.23 with the 5%. The 4.75% rate saves you $22.76 but you’d have to stay in your existing property, and the 4.75% mortgage, for 66 months (5 and a half years) to recoup the closing costs.
With the $1,500 in closing costs, you don’t save any money until the 67th payment. If you move or refinance before the 67th payment you lose money in the form of un-recouped closing costs.
With the zero closing cost mortgage, you have no closing costs to recoup. You save money on the 1st payment.
Also with the zero closing cost approach, if rates drop after you’ve signed the papers, even by a small fraction, you can refinance again, for free, and save even more.
There are cases where paying closing costs and a lower mortgage rate makes sense. The most common is if you are borrowing a higher amount. With a $500,000 mortgage, the payment difference between the 4.75% with closing costs and the 5% without is $75.87. Here you would recoup your closing costs in 20 months. A 20 month payback period may justify the closing costs.
To learn more about whether the no closing cost mortgage makes sense for you, please click HERE.