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How do "No Costs" loans work? We all know there is no such thing as a free lunch, so where does the money come from to pay the costs of the loan? It comes from a higher interest rate which generates a rebate from the lender which is used to pay for some or all of the non-recurring closing costs. All real property secured loans have inherent costs to obtain, such as title insurance, escrow, appraisal, recording fees, ect. These services are paid for by the borrow in all loan transactions. In the case where a broker arranges a premium priced loan (No Cost) and a lender rebate is used to pay for these services, the services are still performed and the cost incurred. The borrower pays the costs of the services via a higher interest rate than would be available if the borrower paid for the services out of pocket or included them into the loan balance. In effect, the borrower finances the closing costs over the entire life of the loan. Assume the borrower wants a 30 year fixed rate loan, with closing costs (including title insurance, escrow fees, appraisal, credit reports fees, ect.) of $2,500 and approximate commission to the broker of 1.375 points for a total of $5,250.
The Payment differential of $86.94 caused by the higher interest rate of the "no cost" loan represents an extra $31,298.40 in loan payments paid over the life of the loan. There are several other options available to borrower's for covering their closing costs. One option is to add the closing costs to the life of the loan. This would lower the monthly payment to $1,502.53. This option would cost $14,198.40 over the life of the loan. We at Donald J. Bahl & Associates are be happy to discuss with you the any and all loan options. We don't use cookie cutter solutions. We pride ourselves on educating our clients so they can make informed decisions. |
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