No Cost Loans
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 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 for a a rebate, the rebate is used to pay for part or all of these costs. 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.
No here is an interesting side note. This technique is used by EVERYBODY who makes a loan. Under the current federal law though, only mortgage brokers have to disclose this to the borrower. Banks do not and will not disclose to you how much of a rebate they are receiving on your loan.
Assume the borrower wants a 30 year fixed rate loan in the amount of $380,000.00, 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 for all closing costs.
Costs and Rebates are based on the interest rates from our rebates page. These interest rates are for this example only. They do not reflect current interest rates which are available.
| Loan Amount | Interest Rate | 21 day pricing | Amount |
|---|---|---|---|
| $380,000 | 7.375% | 2.375% | $9,025 |
| $380,000 | 7.500% | 1.750% | $6,650 |
| $380,000 | 7.625% | 1.250% | $4,750 |
| $380,000 | 7.750% | 0.625% | $2,375 |
| $380,000 | 7.875% | 0.125% | $ 475 |
| $380,000 | 8.000% | -0.500% | ($1,900) |
| $380,000 | 8.125% | -0.875% | ($3,325) |
| $380,000 | 8.250% | -1.375% | ($5,225) |
| $380,000 | 8.375% | -1.875% | ($7,125) |
| $380,000 | 8.500% | -2.375% | ($10,450) |
| $380,000 | 8.625% | -2.750% | ($10,450) |
In order to cover the cost of $5,250, we would need to select an interest rate of 8.250%. This would give us a rebate or cash back of $5,225. We would be able to cover all the cost except for $25. In the above example if we were to pick an interest rate which was nearest to receiving no rebate and no cost, we would pick 7.875%. The difference between these 2 interest rates is 0.375%
| Interest Rate | Monthly Payment | Total Interest |
|---|---|---|
| 8.250% | $2,854.81 | $647,736.93 |
| 7.875% | $2,755.26 | $611,899.01 |
The Monthly payment differential of $99.55 caused by the higher interest rate of the "no cost" loan represents an extra $35,837.92 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.