Mortgage Refinancing with No Closing Costs or Paying Points for a Lower Rate?By
Which Makes More Sense a Refinance Loan with No Lender Costs or Refinancing with Points to Get a Better Interest Rate?
When you choose to refinance, you have the choice of getting a loan with no closing costs or paying for “points” to secure a lower interest rate. Before you make the decision, it’s critical to define the terms involved and do the math!
What Is A “No Cost” Or “Zero Cost” Mortgage Refinance?
“Zero cost” loans are loans you can get without paying any closing costs. The closing costs that you might have to pay vary widely and are not dictated by loan amount. Generally, closing fees will cost at least $2,000, and frequently run to $3,000.
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What Is the Difference Between a No Fee Refinance and a “No Points” Loan?
A zero cost mortgage excuses you from closing costs such as:
— Home appraisal
— Credit report fees for the borrower
— Processing and underwriting fees
— Attorney fees
— Title fees
— Additional miscellaneous costs
In order to get a zero cost loan, you will probably have to settle for a higher interest rate.
A Brief Introduction to Paying Points
A “point” is one percent of the total mortgage balance. When refinancing, you can choose to “buy” points to reduce your interest rate. Whether to use points is up to you – and whether it is wise depends on your loan. If your loan amount is $50,000, a “point” would be $500. Paying down five “points” of your mortgage might be equivalent to your closing costs if they are in the usual range of about $2,500.
In terms of reducing your interest rate, a point is usually worth about an eighth of a percentage point. Paying points always lowers your interest rate by some amount, while negotiating to finance closing costs virtually always increases your rates. Paying points can save you money by reducing your monthly mortgage payments. However, they can be a waste, as paying for enough points to significantly alter your loan may be very expensive.
Under today’s market conditions, most people do not pay any points. The majority of buyers find it easier to negotiate for reduced closing costs, avoiding “up front” payments so they can be on a firm financial footing as they work out the costs associated with home ownership.
If you paid eight points on a $60,000 loan, you would pay a total of $4,800. This would cut your interest rate about 1%, but would leave you with more than $7,000 in cash costs by the end of the transaction. Even over 30 years, few savings would materialize.
The Importance of Negotiating Closing Costs and Interest Rate
Most buyers in the United States consider the immediate benefits of cash in the bank to be far superior to what they can save with points. Unless you have significant savings, points don’t always add up. Even if you don’t plan to buy any points, it’s still important to negotiate the lowest closing cost and interest rate that you can get. Some financing, such as FHA loans for bad credit, help you secure low rates and can even cover closing costs. Looking to these first can be a smart strategic move.
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