You might think you are getting into a very profitable deal by saying yes to a “No-Closing-Cost Mortgage.” However, this is not so. There are many things about mortgage options that you may not know. You will have to understand how it all works before you make your decision on the right mortgage option to choose.
How it all works
In case of discount points, the points that you agree to pay determine the kind of discount you are going to get on your interest rate. Although you do get a discount, the amount of reduction always depends upon the type of mortgage, the lender you choose and the current rate in the mortgage markets.
However, in lender credits, these discount points work in the reverse way. You are paying a higher interest rate which means a higher amount each month; but your lender gives you the credit to offset your closing costs in the form of lender credit. Hence, you are paying a lot lesser at the closing table despite making higher monthly payments.
Make sure the terms are disclosed clearly on the closing disclosure form and the loan estimate that you receive.
There is no such thing as “no closing cost” refinance
It does cost you money to close your mortgage loan. The lender uses up the excess money he gets from your monthly mortgage payments and gives it to you as lender credit while absorbing these costs. By no way is your mortgage lender losing money while giving you discount points or lender credits.
Which one to choose?
If you are planning to stay in the house that you are going to buy, for a long period of time, it makes sense to go pay up the discount points and go below par, even if it means paying up those closing costs from your pocket. This will help you save a lot of money that you would otherwise be paying up on interest rate.
For instance, if you are going to pay $3000 as discount points and if this yields you saving of $50 every month, you would be breaking even in about 5 years (Break-even point = discount points/monthly savings; 3000/50=60 months or 5 years). If you are going to live in that house for this period and beyond, it is a good decision to pay up your discount points.
However, if you are thinking of selling the house in about 3 or 4 years, it would be a big waste paying up your discount points. In such cases a lender credit is always better. This can also help in alleviating your pressure while buying your house, especially if you are a bit tight on your assets. You can use these funds to buy furniture and move stuff.
Now that you know the basics, you surely will be in a better position to decide for yourself.
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