No Closing Cost Refinance and Purchases

 No Closing Cost Refinance and Purchases

Everyone has heard about the famous "no closing cost loan".

How does the commercial put it, "no closing cost, no points, not title fees, no nothing, absolutely no closing cost."

Now, I am going to assume that most people know there's a "catch" and it has to do with the interest rate, and they're right.

So we are going to answer the question "how do no closing cost loans work?"

The truth is, no closing cost loans have been around for a long time, you might say the were the original mortgage. As the mortgage industry "progressed" it became splintered and specialized, sort of like the medical field has, to the point that everyone has there finger in  the pie.

A a result of the specialized lending we now have lower rates, faster closing's and money is more accessable to more people, yes, enen in the middle of a mortgage crisis. Like the medical field, it has become easier and cheaper to let specialized sub-contractors handle the light work.

Doctors outsource labs, MRI's and many other labor specific jobs. Lenders outsource underwriting, processing, titles and closing offices. Now, all of these sub-contracted companies get a little piece of the pie when a loan closes, don't forget Uncle Sam and the title insurance companies too. This is my long-winded way of telling you that no closing cost loans are simply fancy smancy marketing and advertising.

Dont get me wrong, no closing costs loans do exist and are wise choices for a select segment of borrowers in the market. However, "the catch" is that all of the costs associated with closing a mortgage have to be paid by someone, regardless of who closes the loan.

This is the point when most people tell me that their bank "Great Bank of the Heavens" services their loans and absolutely does not charge closing costs what so ever. (Imagine this being said in your aunts voice)

Okay, believe this or not, ALL BANKS SELL THEIR LOANS, as evidenced by the current mortgage crisis. Banks no longer make a mortgage, stick it in a drawer and wait for you to pay it off anymore. None, nada, not even Tony Soprano, he sells his receivables too. The next objection that usually come up is "but I have made payments to the Great Bank of the Heavens for over twenty years."

Remember that whole splintering concept? When banks sell their mortgages on Wall Street, (did I mention that all banks sell their loans?) they sell them servicing retained or servicing released.This means it is possible for the Great Bank of the Heavens to still collect the loan payments without actually owning the loan. "Okay, fine so what the heck does all of this mean?"

I am glad you asked, my long and drawn out point is this, if the banks arent holding the loans to collect the interest to recoup the actual closing costs who's paying it? We have already established that it costs money to close a loan right? We have also established that the bank will not own the loan long enough to recoup the money they have to pay out of pocket to close the loan. So, the obvious answer is that the borrower is paying the closing costs.

So this makes the closing costs question very easy; do we want to pay our closing costs in real dollars at closing or do we want to make our interest rate higher and have "no closing costs? It's that simple, you will pay closing costs, the choice how you pay them depends on how long you will be in the mortgage you are closing. Not the house, but the mortgage.

Fact, "no closing costs loans" have higher interest rates than regular closing costs loans have. So, if you are going to be in the mortgage for 10, 20 or 30 years you will be paying a higher interest rate over a long period of time. This scenario will cost you about 5 to 10 times more money than taking a mortgage out with a lower rate and regular closing costs. That's not an exageration either.

However, if you are positive that you will be in the mortgage less than 5 years it may be feasible to look at no closing costs mortgages. If you take a loan with a little higher interest rate but without closing costs and move or refinance relatively soon it may save you money.

The key is to find the break even point of how long you can stay in the mortgage before the higher rate starts to cost you money. We have a short primer here.