"Today, it's just a house - Tomorrow, it is home."
There is no such thing as a No-Cost Thirty Year Fixed Rate Mortgage
There are costs, appraisal fees, title fees, depending on if a loan is a purchase or refinance. The term "no-cost" actually means that your lender is paying the costs of the loan. A no-cost loan means that there is no cost to you, the borrower. The following is an example, and the rates change from time to time.
The hidden cost of a No-Cost mortgage
A variety of the no-cost loan is the "no-points" loan or even the "no points, no lender fees" loan. You pay the expenses by buying a house or refinancing, but you don't pay the moneylender fees or points. However, since bankers and mortgage officers do not do anything for free, the value must come from somewhere.
So, where does it come from?
First, you should understand how mortgages are valued and how mortgage lenders and loan officers earn income. Each morning mortgage companies create rate sheets for loan officers. The rates usually change slightly from day to day. In volatile markets, they change numerous times a day. There are many various programs on the price sheet, including the thirty-year fixed rate.
One column will record interest rates and another line that includes the cost for that appropriate rate.
Rate Cost (points)
In the above example, 6.75% has a standard price, which means zero cost. The lower in rate you go, the higher the value or points. A point is equal to one percent of the loan amount. The cost column for the higher interest rates indicates a negative number. For example, (1.500) equals -1.500, which means that instead of the loan's cost, the lender is willing to pay out money for those interest rates. They call it premium or discount pricing.
How do our mortgage companies and loan officers make money?
When the loan officer gives you a rate quote, he will usually add one to one and a half points. Most companies leave it to the loan officer's discretion to add to the base cost. However, they usually require at least a minimum add-on, which is often one point. The loan officer's commission depends on his split with the company. He receives a portion of the add-on, and the rest goes to the company. Let us assume the No-Cost Thirty Year Fixed Rate Mortgage that the loan officer is adding on one point, and you were willing to pay one point for your loan, then your rate would be (according to this rate sheet) 6.75%. You would pay one percentage point and receive an interest rate of six and three-quarters. If you wanted a lower price and were willing to pay two points, you could get 6.5%. If you wish for a no-point loan, your rate would be 7%. The loan officer and the mortgage company would split the one-point rebate, listed as (1.000) on the rate sheet.
See how it works?
Cost noted on the rate sheet above, moneylenders have specific charges they collect, too. Includes certificate, processing, underwriting, flood, wire transfer, and tax service fees. Most lenders charge these fees but may call them different things. Some are actual costs to the lender, and some are simply fees to generate additional income. They are usually in today's mortgage market and can vary from $600 to $1,300. Also, there will often be an appraisal fee. Your appraisals and credit reports are considered lender fees. It is common for companies who charge higher fees to have a slightly lower interest rate. Therefore companies that charge lower fees will usually have a higher interest rate. Shopping entirely based on costs, you may spend more in the long run because your interest is higher. Points, Lender Fees?
The point is that if you want a no points - no lender fee loan. Then on our rate sheet above, you may get an interest rate of 7.125% because the loan officer has to bump the interest rate further than on a no-points loan to cover his own company's fees.
If you want a No-Cost Thirty Year Fixed Rate Mortgage, the loan officer has to bump your interest rate further. That is because all of your purchase or refinance costs do not come from the lender. The escrow or settlement company involved in your transaction will charge a fee. The lender will require title insurance, and the title insurance company charges a fee for providing this insurance. If your new lender requires information from your homeowner's association (if you have one), then the homeowner's association will most likely charge a fee for providing those documents. Your current lender will usually charge at least two fees if you are refinancing: a demand fee and a reconveyance fee. A demand fee is charged simply for providing payoff information. The reconveyance fee is charged because your current lender prepares a document releasing your property as collateral for their outstanding loan. This document is called a reconveyance.
Do you need to collect points for a zero-cost loan?
These charges will add about one additional point to how much the loan officer must collect in premium pricing to cover the costs associated with your refinance or purchase. For a No-Cost Thirty Year Fixed Rate Mortgage, they will generally need to collect somewhere in the neighborhood of two and a half points because points are a percentage of your loan amount and most of the fixed cost. It takes fewer points to provide zero costs on higher loan amounts.
On smaller loan amounts, it takes more. One percent of $200,000 is $2,000, and one percent of $100,000 is only $1,000, so you can see how it is easier to cover costs on more jumbo loans. Does it make sense to do a zero-cost loan?
Does it make sense to do a "0" cost loan?
On a $200,000 thirty-year fixed-rate loan, the difference in monthly mortgage payments will be about $87, using the example rate sheet on the first page. Over thirty years, it works out that you will pay more than $30,000 extra for getting a zero-cost loan. So if you intend to remain in the home for an extended period, it just doesn't make sense. Suppose you plan to stay for only five years. Using the $200,000 example, if you stayed longer than fifty-five months. It would make more sense to pay your costs and get a lower interest rate. Keeping the loan for a shorter time makes more sense to pay zero costs and get a higher interest rate.
Do I need a 30 year fixed loan?
Are you staying in the home past 5 years? Then you would probably want a thirty-year fixed rate, anyway. Get a loan with a fixed payment for the first five years, then convert to an adjustable rate or whatever fixed rates are five years from now. These loans have an interest rate of almost a half percent lower than thirty-year fixed-rate mortgages. Since it is impossible to do a zero a no-cost thirty-year fixed rate mortgage type of loan, you would have to compare to paying points on a loan with a fixed payment for five years. The difference in payments would be about $150. The two-and-a-half-point rebate equals $5,000. If you stay longer than thirty-three months, pay the points and get the loan with the five-year fixed rate.
A new loan for less than three years?
Finally, carry the discussion one step further. Suppose you know you will be on the new loan for less than three years? Will it make sense to get a No-Cost Thirty Year Fixed Rate Mortgage? Then you get an adjustable-rate mortgage. As long as the start rate is two percent lower than the current fixed price, you cannot lose. In the first year, you will save a lot of money. In the second year, you will probably break even. In the third year, you will give up some savings from the first year, but not all of it. Zero-cost loans don't make sense for most homebuyers. But they sound perfect in an advertisement!
On an FHA Streamline Refinance Without an Appraisal (not a purchase - which the article talks about), it makes sense to do a zero-cost loan. The new loan has to be the same amount as the existing balance of the current mortgage. Let us say the homebuyer only has enough money for a down payment. With no way to cover closing costs, and the seller will not assist with closing costs, zero cost may make sense. (However, I would still recommend negotiating terms with the seller - be willing to pay a higher price in exchange for the seller paying your costs.)
No-Cost Thirty Year Fixed Rate Mortgage, are they for real, you decide.
Are you looking to sell your home or buy a home in the Coastal Bend area?
Robert Ellis | Realtor | Levi Ellis | Realtor | Naomi Ellis | Ellis Realty Group - Keller Williams Coastal Bend