The "No Closing Cost" Myth

By Mark Barnes

The No Closing Cost Mortgage is one of the biggest myths in the lending industry. A day never passes that the radio isn’t blasting some crazy advertisement about a new loan program that XYZ mortgage company has and no one else offers. One of the oldest programs in the mortgage business remains steadfast in both its high profile and its duplicity. This program is the No Closing Cost Mortgage-- the one bankers say is free, but you actually pay for as long as you have the loan.

The no closing cost mortgage is virtually everywhere. "Hey, refinance your loan today, and there will be no closing costs," the advertisement scream. Wow, a free loan. Imagine the money you'll save. So, if you are in the market for a refinance loan or home equity line, which you probably should be, with rates remaining very low, you might consider running to XYZ mortgage company, who is now offering no closing cost mortgages.

Just be careful you don't go bankrupt, along the way. Remember, the old cliche about nothing in life being free, because it makes a lot of sense.

You actually can get a no closing cost mortgage. What the unscrupulous mortgage people selling these programs don't tell you is that you pay a higher interest rate than you really qualify for, when you get your loan for "free." So, you might save $2,000 or $3,000 in closing costs, but your monthly payment could be $100 to $300 higher than it would have been if you had actually paid the costs.

Imagine taking this loan and saving $2,000 in total closing costs. Perhaps you borrow $200,000. Now, if you simply pay all of the closing costs and tell the banker you want the best rate available, let's say it is 6% for this example, you would have a monthly payment of $1,199. Now, let's assume the wily banker convinces you to pay no closing costs and take an interest rate of 7%. He might say, "Now, your interest rate will be a bit higher, but you'll save $2,000 in closing costs." Sounds great, you might think.

What he doesn't do, though, is spell out the difference in the 6% rate you could qualify for, versus the 7% rate you choose to take for your no closing cost mortgage. If you borrow $200,000 at 7% interest, your monthly payment is $1,330. This is $131.00 more each month than you will pay on the same loan at 6% interest.

If you choose to pay the closing costs and save $131.00 monthly, it will take you 15 months to get your $2,000 in closing costs back. Now, if you keep this loan for five years beyond that first 15 months, you will save an additional $7,860 at the 6% interest rate. If you listen to the crafty banker, selling the no closing cost mortgage, you'll allow nearly eight thousand dollars to drift right up your home's chimney.

To avoid this mortgage trick, learn exactly what the total closing costs will be. Calculate the difference in the two monthly payments (one with closing costs and one without). If that amount will pay back your closing costs in two years or less, and you intend to remain in your loan for at least five years, pay the costs and take the better rate.

Use this method, and you'll never go wrong.

Helpful source: www.mtgprofessor.com