We want to make one thing abundantly clear; you do not have to pay closing costs for your refinance. That being said, we also want to be very direct on how this works. A "no cost" refinance comes at a slightly higher interest rate. When this option is selected, the higher rate can cover several thousand dollars of costs to you.
Deciding on which is the best option - for you, is always dependant on your circumstances. If you have limited savings and not an abundance of 'emergency' savings/reserves, you should seriously consider a no-cost refi.
If, on the other hand you are fully flush with cash reserves, you should probably be looking at paying the closing costs yourself and possibly buying down the rate to maximize cash flow if/when you can.
For example, assume refinancing a $825,000 property with a first mortgage. And also asume your current monthly payments are $4,201.
We then review the appraised value of the home, your debt-to income-ratio and credit and are now confident you qualify for a 30 year fixed loan at premium pricing. So, what should you do? Pay closing costs yourself, a "no-cost" loan or pay for them upfront?
|Option A||Option B||Option C|
Upfront closing costs -
Paid by borrower
Zero Closing costs-
Paid by Lender
Financed Closing costs -
Included in Loan
|New monthly mortgage payment||$3,108||$3,201||$3,129|
|Total of current payments||$4,201||$4,201||$4,201|
|Months to break even||3.88||0||3.95|
*NOTE: Rates reflected here are for illustration purposes only. Rate and points are subject to change without notice.
If you choose Option A, If you were to keep the new loan for 30 years, you’d pay $487,079 in interest over the life of the loan. Add the $4,239 you paid out of pocket up front, and the total cost of your loan becomes $491,318. Your interest rate will be 4.25% and you’ll pay $4,239 in closing costs out of pocket. Your monthly payment will be $3,108, and you’ll save $1,093 each month.
Comparing Option B to Option A. The monthly payment difference is $93. You’d have to keep the loan for a minimum of 46 months, or about 3.8 years, before realizing the monthly savings of $93 (divide the $4,239 closing costs by $93 per month savings to arrive at 46 months).
If you choose Option B, You will save $1,000 per month over what you’re paying on your mortgage now and will not have to pay any cash out of pocket, however your interest rate will be 4.5%. And if you were to keep the loan for 30 years, you’d pay a total of $520,614 in costs.
If you choose Option C, your interest rate will be 4.25%, and you’ll pay $4,239 in closing costs, just as in Option A. The difference is that the closing costs are being financed (included in the loan and amortized over 30 years), which means you won’t pay cash out of pocket. If you were to keep the loan for its life, you’d pay $490,345 in interest. Comparing Option C to Option A, you’d pay $211 more each month, but you wouldn’t have to pay the $4,239 in closing costs up front.
If you plan to be int he home for less than 3.8 years, Option B may be prefereable. If not, then Option A or C would probably make the most sense.
Although your final choice would depend on your goals, all of the options put extra cash into your pocket each month. I will help you compare terms, including monthly payment and breakeven differences, so you can decide which “closing costs” option is best for you.
Call me at 415-345-4375 or Email me to schedule a free consultation and review your closing cost options.