I’m Refinancing – Should I Let My Lender Pay My Closing Costs?
Posted by Paul Gonzales | Visited 965 times, 1 so far today | Currently 1 Comment »
You have probably heard the radio and TV ads proclaiming “Absolutely No Closing Costs!” or “Refinance for just a flat $295 Fee!”. Your common sense tells you that nothing is free, certainly not from a bank or mortgage company.
Well, you are right. Lenders don’t work for free any more than you do. So how do they do it? They don’t – You do. That’s right, the costs are buried in your interest rate. So does it ever make sense to get a “no-cost” loan? The answer is “it depends”.
An example will make this crystal clear: Say you can get a $300,000 loan at 6.25% by paying your own closing costs of about $2,700. Your monthly payment would be $1,847 per month. At a higher interest rate of 6.625% the lender will pay the $2,700 in closing costs for you and your monthly payment would be $1,921 per month. Which offer should you take?
The answer is simple arithmetic: At the higher rate, you will save $2,700 right up front since the lender is paying the closing costs, but your monthly payment will be $74 higher. So if you divide your initial savings of $2,700 by the extra $74 per month that you’ll pay at the higher rate, the lender will get its $2,700 back in just over 36 months (three years).
Bottom line:If the lender pays your closing costs, you will be saving money as long as you keep the loan in this example for less than three years.
However, if you keep this loan longer that three years (with the extra $74 in interest each month) you could wind up paying far more than your original $2,700 in closing costs. For instance, after 4 years you will have repaid over $3,500 in extra interest; after 6 years over $5,300!
You get the idea. The correct answer is “it depends” on how long you think you will be keeping the loan. So the next time you are considering whether or not to pay your closing costs, ask your trusty lender to work the numbers for your particular situation – then you can make an informed decision. Remember, it’s not rocket science, just simple arithmetic!
Feel free to call or email me with questions regarding a refinancing strategy for you – (760) 746-7388 or paulforloans@aol.com
[...] I’m Refinancing – Should I Let My Lender Pay My Closing Costs? Should I pay my closing costs? You have probably heard the radio and TV ads proclaiming “Absolutely No Closing Costs!” or “Refinance for just a flat $295 Fee!”. Your common sense tells you that nothing is free, certainly not from a bank …Picture Perfect San Diego – http://pictureperfectsandiego.com [...]