No closing cost mortgage tips and background information. Break even analysis.
The No Closing Cost mortgage is becoming very popular in Pennsylvania. It was started and the word was spread in 2006 by a large bank as a marketing idea to bring in new business as things were starting to slow down in the mortgage industry due to rates being up and the refinance boom being over. Now, we are receiving calls for these loans every day. But, we do not always recommend them and here is why:
If you are staying in the house (or keeping this NCC mortgage) more than five years, the NCC loans cost more.
Closing costs average $2,200 on a $200,000 loan and $2,500 on a $300,000 loan. By increasing your interest rate we can make enough commission (yield spread premium) to pay these costs for you. For each .125% we add to the rate, we make an extra .5% (in general)
Closing costs $2200/200,000 loan = .011%, or 1.1 “discount points”
If we add .375% to your loan, we make an extra 1.5%, which covers your closing costs and allows up to reimburse your up front fees.
|Example using $200,000 as a loan amount.
Using 5.5% fixed 30 year rate with 0 points
|Closing Cost (2 options):||No Closing Costs:|
$2,200 in closing costs plus $550 in up front fees: $1,135.58 P&I plus a total cost of $2,750. (APR=5.59%)Total P&I Paid:
1 year = $13,626.94
5 year = $68,134.68
10 year = $136,269.36
20 year = $272,538.72
30 year= $408,808.08
|$200,000 at a rate AND APR of 5.875% (5.5% + .375% for the NCC option)= $1,183.08Total P&I Paid:
1 year = $14,196.91 (570 more/yr)
5 year = $70,984.53
10 year = $141,969
20 year = $283,938.13
30 year= $425,907.19After 5 years this option is costing you extra money.
Loan amount of $202,750 with all costs rolled in: P&I of $1,151.19Total P&I Paid:
1 year = $13,814.31 (188 more/yr)
5 year = $69,071.53
10 year = $138,143.06
20 year = $276,286.13
30 year= $414,429.19
We, like other no closing cost lenders, pay for your required closing costs (you still need to obtain title insurance, flood certifications, an appraisal, etc.) by increasing the rate. This means a borrower is financing these costs over the life of their loan.
Interestingly, 10 years ago the norm was to pay 3 points to obtain the lowest possible rate. Now, no homeowners buys 3 points anymore. 0 points became the norm with it’s higher rate about 5 years ago. NCC has an even higher rate but for those who are planning to move or refinance in 5 years, it is the best choice. It could also be matched with a 5/1 ARM.