One of the biggest mistakes homeowners make is continually adding to their principal balance by accruing loan fees to refinance every time an opportunity arises to lower their interest rate. With the average homeowner refinancing every three to five years, and with record low rates lately, even more frequently, it’s no wonder mortgage balances are not reducing. Before they recoup the closing costs of their last mortgage, they refinance again, resulting in an ever-increasing loan balance.
The solution to this dilemma is a no-cost loan. This is a loan that will have a slightly higher interest rate than a loan that has fees, but all of the closing costs incurred are paid by the mortgage lender, not the homeowner. That way, the principal balance of the new loan can start out the same as the principal balance of the loan being paid off. There is not any equity loss, allowing the homeowner to maintain their strategy of paying down their mortgage, while still taking advantage of great interest rates and enjoying a lower mortgage payment.
When comparing a mortgage option that has closing costs vs. a no-cost loan, the full cost loan will often have a higher mortgage balance to cover the closing costs incurred. If you take a higher loan amount at a lower interest rate, and compare that with a lower loan amount at a higher interest rate, the results can be astonishing. In addition, because the no-cost option has a higher interest rate, a greater portion of the payment will be tax deductible. On an after-tax basis, the breakeven point is typically much more than TEN years before the homeowner will have benefited by paying closing costs to obtain a lower rate.
As a Certified Mortgage Advisor, my role is to analyze each of my client’s goals and objectives, and make recommendations as to the best solution for their situation. In most cases, I suggest the no-cost option. We have a program that compares and contrasts different levels of closing costs vs. interest rate, and projects a breakeven point for each option. No-cost loans are available for home purchase loans as well as refinances. There are restrictions to no-cost loans; however, most homeowner’s loans will qualify (subject to credit, income and appraisal qualifications).
If you are wondering what interest rate and closing costs options are available for you, use our Find Your Best Rate Tool. There will be a series of questions to answer and you can view the different interest rate and closing cost options. Any interest rates that show the closing costs to be $0 or less are essentially no-cost loans. Also, be sure to check out the video where I explain the benefits of a no-cost loan as well as the written case study.
If you would like to discuss your options, call my office at 801-501-74950 and request a free mortgage review. I will review your overall mortgage, debt, and equity situation, and tell you if a change can and should be made. As a trusted advisor to hundreds of families, you can be certain you will receive honest and professional advice.