If you are considering taking out a new mortgage or refinancing your current mortgage, you may have noticed lenders proudly offering “no closing costs mortgages.” The mortgage lender claims this loan is free of closing costs; however, you pay for this as long as you have the mortgage.
It really is dishonest, but many mortgage lenders do it. They use “no closing costs” as a gimmick to distract you, and then sock it to you with higher interest rates. What the lender doesn’t tell you about this mortgage is you are paying a higher interest rate than you would otherwise. You could qualify for a much better mortgage by paying the closing costs.
You may save $2,000-$3,000 at closing with a no closing cost mortgage; however, your monthly payment will be anywhere from $100-$300 more than if you had paid the closing costs. Your mortgage lender might even try to talk you into taking a higher interest rate instead of paying the closing costs on a traditional loan.
Suppose for example, you would save $3,000 in closing costs by taking one of these mortgages. For a $200,000 mortgage at 6% interest your monthly payment will be approximately $1,200. If the offer on the table is 7% interest with zero closing costs you would save $3,000, right? Wrong!
At 7% interest your $200,000 mortgage will have a monthly payment of $1,330; this is $130 a more than if you paid the closing costs yourself. If you pay the $3,000 you will break even after 23 months. If you take the higher interest rate you’ll pay an extra $8,000 to your greedy mortgage lender on top of the $3,000.
The only time these loans are a good deal is if the interest rate increase is very slight, say .125 percent. There are not very many lenders willing to offer no closing costs loans at this interest rate. In almost every case you are better off paying the closing costs yourself in exchange for a better interest rate.
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