Here is the short and splenda on how no closing costs mortgages work. When people hear or read "No Closing Costs," the first thing they ask is, "HOW?"
Especially in a declining interest rate environment I dont think it makes any sense (in most cases) to pay closing costs. Just like taxes and death you can always guarantee that there are costs associated with your mortgage. But you do have options. I always let my clients make the choice of whether or not they want to pay closing costs. Hold on I know what you're thinking, "Who would ever want to pay closing costs if give the choice?"
Nobody should work for free and mortgage bankers are no differant. So let's say you want to refinance your $250,000 mortgage that currently sits at 6.5%.
Today I can get you 5.25% with no closing costs, none. There are no attorney fees, no lender fees no recording fees.....nothing.
Or I can get you 5.00% with full closing costs (about $1,400).
All we are doing is making about $1,400 more on your loan at 5.25% and passing that revenue on to you in the form of a lender credit to cover all your expenses. In both examples the borrower needs to pay their own escrows and any odd days interest but that should be assumed.
The 5.25% no closing cost option would save the borrower exactly $200/month. The 5% option saves them $238/month. The difference between the two options is $38/month. But why pay $1,500 in closing costs to save an extra $38/month? The payback period on that would be 39.5 months ($1,500/38).
If you are 100% certain you will be in your house for a very long time then maybe consider paying closing costs but right now cash is king so take the $200/month savings and don't pay $.10.
Also, and this is very important, most economists and mortgage bankers alike feel strongly that we might see lower rates in the near future. So if we do end up seeing 4.75% or even 4.5% how would you feel if you just paid $1,500 to get 5%? In the no closing cost scenario you can just refi again at a better rate and still have not paid anything. This is the value that a good mortgage professional brings to the table. Get options. Figure out what best helps you achieve your long and short term financial goals and do what you are comfortable with. There is nothing wrong with paying for the lowest possible rate or even paying discount points.......I'm just not a big fan.
I leave you with this: "How would you feel if you woke up tomorrow and mortgage rates were at 6.00% and never came back down?" And like I always say, "pigs get fed and hogs get slaughtered." If you have the opportunity to refinance right now but are holding out for some rate below 5.00%.....get in the game and lock in some gains.
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