What is a No Closing Cost Loan

by Mike Goblet on October 23, 2012

I am sure everybody has heard about no closing cost loans and wondered about them. Did you really think that a no closing cost loan means there were no origination fees, there were no title fees, no underwriting fees? The answer is, “Of course not.”

Every loan has those items attached to them. The real key is making them so that they’re not an out of pocket expense to you. The real question is, “How is that done?”

Now, often a common way done, and this really isn’t even a no closing cost loan, is they roll them into the new loan amount. Well, you are still paying the costs, but now you are paying for them in the new loan. I’m not talking about that at all.

There is a way, however, to avoid paying the title fees and origination fees and underwriting fees so it really is truly no out of pocket expense to you. The answer to that is it’s in the rate. 

Now, by that I mean you’ve heard about buying down a rate, OK, where you pay money in order to get a lower rate. The fact is a lender will actually incent you to choose a higher rate, because it’s actually easier for them to sell that loan on the secondary market and worth an investment to them to provide to you to get to that higher rate.

Let me give you an example of what I mean and the impact that that can have. One of my better priced lenders today, based upon current pricing is offering a 30‑year fixed rate mortgage at 3.25 percent. Even that is with a rebate. 

But that rebate is 1.375 percent. That’s a percent of the loan amount, so the size of your loan will dictate the amount of dollars they’ll provide, but let me put this into a specific.

If you have a $200,000 loan, that 1.375 percent means that that lender will give you a rebate of $2,750. That’s pretty nice. That’s how you cover some of the cost. But that same lender, if you choose 3.375, will offer a rebate of 2.25 percent. On that same $200,000 loan, they’re going to give you $4,500 in rebate, or $1,750 more towards your closing costs.

If you look at ‑ to find out if this is really in your best interest, what you want to do is look at the difference in principle and interest payment. In this case of this loan, 3.25 percent versus 3.75 percent on a $200,000 loan would have a difference in principal and interest of $13.90.

If I divide that rebate difference of $1,750 by the $13.90, you will see that it would actually take you ten years of savings at the lower rate in order to equal that rebate difference. I think you can easily see that this is pretty important information for you to know and have access to when you’re choosing what’s the best rate. The best rate isn’t always the lowest Arizona mortgage rate available.

If you want to learn about how to get a new no closing cost loan, no out of pocket expense to you, give me a call and let’s discuss the specifics of your situation. I always share my lender’s pricing that we use and let them help choose the rate that works best for you.

Call United Mortgage Financial Group at 480‑503‑3533 and we can discuss your situation.