Almost everyone has heard an advertisement, for a “no cost” home loan, whether it be for a purchase or refinance home loan. The truth of the matter however, is that there is really no such thing, as a “no cost” loan. Depending on the type of loan you take out, your credit score, down payment (or equity position on a refinance), the total cost of the loan will vary, but there will be a cost for that loan.
However, through the use of “lender credits”, you can create a no cost home loan, whether you are looking to purchase a home or refinance your existing home loan.
In this article, we will discuss the various options available, to use lender credits, when obtaining a purchase home loan, whether you are looking into a Conventional, FHA or VA loan. And we will also talk about when this might make sense.
Home Purchase Loans:
When purchasing a home, you essentially have three options to pay your closing costs or the fees associated with obtaining a home loan and all third-party fees.
You can choose to either pay those fees out of pocket, or you may negotiate and have the seller provide a credit for your closing costs, or you may obtain a lender credit for closing costs.
In today’s housing market, where it is still a highly competitive marketplace, it is often times difficult to have a seller agree to pay your closing costs. If you don’t have the funds for the down payment and to pay your closing costs out of pocket, it makes sense to consider a lender credit to pay for your closing costs.
There is no exact formula that fits everyone’s situation, but in general, in order to obtain a lender credit to cover all of your closing costs, your interest rate will be between .375% and .50% higher, then if you did not receive a lender credit for closing costs.
That may seem like a large increase, however it may make a good deal of sense. For instance, let’s say you are purchasing a home at a $250,000 purchase price and putting a 5% down payment (obtaining a loan for $237,500) and your total closing costs will equal about $5,500. If in this scenario, you have to raise your interest rate by even .50%, in order to obtain a lender credit for those $5,500, then your monthly payment would rise by $71 (from what you pay, if you didn’t take the credit). That means it would take you 78 months, of paying the .50% lower interest rate (the option without a lender credit), to make that a cheaper overall option.
In addition, if interest rates hold steady, you can always refinance the interest rate taken at closing. In this regard, if you don’t have the funds needed for closing costs on a home purchase or just want to hold on to additional funds at closing, a lender credit is definitely worth considering.
Home Refinance Loans:
On a home refinance loan, you have three options once again, when it comes to paying closing costs.
The most common thing done, when someone refinances, is that the costs of the loan are rolled into the new home loan taken (which is an option on refinances, but not purchase loans). The second option is to pay all of the new loan costs out of pocket (by bringing in funds to closing, when signing your final loan paperwork).
And then the final option, would be to take a lender credit for closing costs. Once again, the cost of the lender credit will vary, depending on the loan type, your credit score and other factors.
On a conventional refinance loan, you can expect for your interest rate to be about .25% to .375% above the lowest available interest rate, when receiving a lender credit.
While on an FHA streamline refinance or a VA streamline refinance (VA Interest rate reduction loan), the interest rate might often only be about .125% higher, than the lowest available interest rate.
If the point of the refinance, is saving money in the short and long term, then it once again would make sense to at least look at both a standard closing cost and a lender credit option, when refinancing your home loan.
These are just some of many options to purchase or refinance a home loan without closing costs, through the use of lender credits. As always, it makes sense to speak to a licensed lender, such as Strategic Mortgage to fully qualify and see what home loan options are available to meet your specific situation.
For more information on current home loan programs and options for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 219-3682 or by emailing: email@example.com or online at www.strategicmtgaz.com
Vasilios Kamboukos – NMLS#160440